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DeVol Insurance & Financial Services
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More on Systematic Withdrawal, or
Opening the Spigot
 In past newsletters I have covered the three primary approaches to managing retirement income:
By far the most commonly used is the last, the systematic withdrawal approach, especially if it is re-titled "non-systematic withdrawal approach." This is because few advisers are trained in how to manage retirement income to last a lifetime and their clients just take withdrawals when they need the money in a dangerously unsystematic fashion.
An article appeared in the Journal of Financial Planning in 2002, written by William Bengen, which claimed to show that a classic 60-40 portfolio (60% stocks, 40% bonds) would sustain withdrawals of 4%, keeping pace with inflation, for 30 years over any market cycle over the past 75 years. This means, for example, that if you have $1M, you can take out 40K each year, with increases in inflation, for the rest of your life. This has led some to refer reflexively to the "4 Percent Rule," and many have relied upon it. |
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A Moment for Social Security and Medicare
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Everyone knows that you can apply for Medicare when you turn 65. To be more precise, you can apply for a benefit effective the first day of the month in which you turn 65. So, if your 65th birthday is June 25th, you are eligible on June 1st of that year.
But what if you are still working? Do you need to apply? The answer, as with most questions in this area, is: it depends. Click here for more information.
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However, some consider it much too conservative, and some consider it much too aggressive -- such is life in the blossoming field of retirement income planning.
 On the aggressive side:
Only 4%, are you kidding? 4% sounds like a very small amount to the newly retired person, who is, by the way, suddenly in charge of more money at one time than he or she had seen before in their entire life. But see this chart from Putnam Investments.
The equity portion of the portfolio did not include any of the asset classes that have historically outperformed the S&P, such as small cap stocks and emerging markets. Also, it did not include any of the newer, so-called "alternative" investment strategies such as Real Estate Investment Trusts, managed futures, and commodities.
On the one hand, you may rest somewhat assured that you will not run out of money, but the odds are that you will leave a huge amount "on the table." Perhaps you can spend this in your declining years. But would you rather have a surplus in your eighties and nineties, or live well in your sixties and seventies?
On the conservative side: 
They do not take into consideration this unprecedented low interest rate environment, where money held in cash currently pays next to nothing.
Fees -- the investment returns did not account for any management fees, but rather used simple indexes.
The study calculations did not include the effect of income taxes on returns.
The 4% rule does not account for the future possibility of increased life expectancy as a result of the explosion of biomedical research.
One economist did some work that showed that the research only considered returns in US markets over the past 75 years. These years have been unusually positive over US history. Furthermore, if you look at other countries-consider the economic history of Europe during World War I, the Great Depression, and World War II-the safe withdrawal rate is considerably lower.
Another Factor
Another factor weighing upon the decision is when the withdrawal takes place. You can employ a much higher withdrawal rate at the end of a bear market than at the end of a bull market. This is because the bear is often followed by a bull, and, conversely the bull is often followed by a bear. Those who retired, for example, in the year 2000, may have dangerously depleted their assets during this long bear market. I have seen a chart that showed that $1 Million invested in all stocks, with $50,000 withdrawals starting in the year 2000, would be totally out of money by the end of last year.
So, clearly the 4% rule, or "rule of thumb," is a good starting point for the discussion, but not the end of the story.
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{ INTERESTING TIDBIT }
Do you ever wonder how your spending compares to that of others in your age group? The latest Expenditures of the Aged Chartbook shows how people over 55 are spending
their money.
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 Thomas Phelps DeVol is the founder of DeVol Insurance & Financial Services. His focus is on retirement income planning. He enjoys listening to his clients' ideas about their plans for retirement and helping them transform those ideas into an attainable plan for the future. His persistence and diligence are the keys to his success - and that of his clients.
Tom has three children and lives with his wife, Connie, and their two younger children in Newton, Massachusetts. He enjoys gardening, tennis, biking and opera.
Tom can be reached at 617-964-6404 or via email. |
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Securities offered through Sammons Securities Company, Member FINRA/SIPC. Fee-based investment advisory services offered through Sigma Planning Corporation, a registered investment adviser. DeVol Insurance & Financial Services is not affiliated with Sammons Securities Co. |
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