One More Method for Managing Income in Retirement

In my past newsletters I have reviewed the most popular withdrawal and investing strategies for managing retirement assets during the distribution, or "DE-cumulation" phase. Here's another. 

The Guardrail Approach

This spring I was successful in losing some weight. I've done this many times before. You know, like Mark Twain once said about quitting smoking, "It is easy to quit smoking. I've done it hundreds of times!" I've lost weight many times in the past but, as many of you know, it is hard to maintain the new weight. I've had some success this year employing the following, simple strategy. I weigh myself every morning and if I've gained a pound, BAM! I'm back on the diet. This technique is working! Psychologically, I can handle losing a pound. It is facing weeks or months on a diet, trying to lose 10 or more pounds, that scares me.

Well, there is research, by someone named Jonathan Guyton among others, which has shown success with a similar strategy for your portfolio. As my readers will know, there are studies that have demonstrated some success in beginning withdrawals at 4% of a portfolio, and increasing them for inflation. This has been shown not to deplete your portfolio over a thirty year period in most cases. For more on this refer to my summer, 2013 newsletter.

The guardrail approach modifies this. To oversimplify it, you can withdraw an initial amount above 4%, say 5%, if you agree to: 1) reduce your withdrawals during down years in the market, and/or 2) take some gains from your stock portfolio during good years and store them for the inevitable market corrections. The major problem with this is, of course, it is easy for me to say "Reduce your withdrawals." Remember, that means reducing your spending. Can you do that? Some say that we should be ready, in times of severe market conditions, to reduce spending and that people will expect that. But it is usually much more easily said than done.

Issues surrounding risk are more visceral or "real" in retirement. During the pre-retirement accumulation phase, when your portfolio goes down you might notice it, but it does not affect your lifestyle. During the DE-cumulation phase in retirement, when your portfolio goes down you have to spend less money and your fear (not to mention your likelihood!) of running out of money increases.