海角大神

As a practical matter, the factors that determine how long听听after we retire fall into two categories: those we can control and those we cannot. Major factors that are largely beyond our control include, of course, capital markets returns and听how long we live.听Factors that are, at least to some degree, within our control include:

• Annual withdrawal amount
• Annual withdrawal adjustment (cost of living increase)
• 听(how money is invested)
• Investment expenses
• Withdrawal strategy (which assets to withdraw, and when)

While each of these has been has been explored in academic research, a review of popular financial planning applications finds that the influence of withdrawal strategy has been largely ignored at the consumer/advisor level. In fact, nearly all programs assume that retiree portfolios maintain a constant allocation with annual portfolio听听throughout retirement. Under these models, withdrawals from the various asset classes are typically made in proportion to their weight in the portfolio, followed by rebalancing to get the asset classes back to their designated percentages of the portfolio. The unanimity with which this methodology has been applied has led to the implicit assumption that constant allocation with annual rebalancing is an efficient withdrawal strategy for real world portfolios. But is this truly the case?

To illustrate the influence that withdrawal strategy may have on retirement income sustainability, consider the following reasonably realistic retirement planning scenario:

• 30 year retirement horizon
• $1 million initial retirement portfolio value
• 5% ($50,000) initial withdrawal rate
• 3% annual cost of living increase
• 60%-to-40% allocation between stocks and bonds, with equities divided 50% large cap, 30% small and mid-cap and 20% international; bonds are assumed to generate a constant 2% rate of return (roughly equivalent to the current 10 year听听测颈别濒诲)
• 1% annual investment expenses

With these conditions, I tested four different withdrawal strategies using听, a tool I developed. The results of 5,000 simulations for each of the four strategies tested are presented in the tables below. The left column shows performance percentiles for the portfolios in the 5,000 simulations 鈥� the performance for the portfolio at the 80th percentile, the 60th percentile and so on, down to the worst performing portfolio in any simulation. The amounts in the grid are the remaining portfolio balances in five-year increments at the given percentile. Each table also shows the median portfolio 鈥� where half did better and half did worse 鈥� as well as the percentage of the 5,000 simulations that were successful, meaning they did not run out of money in the 30-year time horizon.

Table 1:听Constant allocation with annual rebalancing

Table 2: Spend stocks first, then bonds(aka 鈥渄ecreasing equity glide path鈥�)

Table 3: Spend bonds听first, then stocks(aka 鈥渋ncreasing equity glide path鈥�)

Table 3:听Guardrail strategy(constant allocation, but don鈥檛 spend听stocks in down years)

Note:听The guardrail strategy involves converting stock and bond gains, if any, to cash and then spending down the cash, followed by bonds and then stocks. Under this approach, equity allocations are not reduced following negative-return years until all of the cash and bond allocations have been exhausted.

The results in these four tables clearly show that the choice of withdrawal strategy can have a dramatic effect on retirement income sustainability. The results also show how the widely adopted constant allocation strategy may be less than optimal.

Though the difference between the constant allocation and 鈥渂onds-first鈥� withdrawal strategy is surprisingly dramatic, it is generally consistent with published research. For example, in a听听in the Journal of Financial Planning, SUNY professors John Spitzer and Sandeep Singh demonstrated the superiority of a similar bonds-first withdrawal strategy. They concluded:

鈥淲hile the wisdom of rebalancing in the accumulation phase of the life cycle is widely accepted, the wisdom does not appear to extend to the withdrawal phase. 鈥� Rebalancing during the withdrawal phase provides no significant protection on portfolio longevity.鈥�

More recently, in a听听in the Journal of Financial Planning, noted retirement researchers Wade Pfau of American University and Michael Kitces of the blog Nerd鈥檚 Eye View (not affiliated with NerdWallet) reached a similar conclusion about the value of avoiding equity withdrawals early in retirement.

While this post is intended to draw attention to the fact that withdrawal strategy is an overlooked and critically important consideration in determining income and portfolio sustainability, it is not necessarily intended to suggest that the bonds-first approach is the optimal solution. Indeed, a number of papers have been published recently proposing a range of dynamic withdrawal strategies that are likely superior the ones presented in this paper. Whether these strategies are practically implementable by consumers and their financial planners is a matter for further discussion.听Critical thinking is required by the user in evaluating the merits and limitations of all retirement planning calculators.

This article also听appears at听.

Learn more about John on NerdWallet鈥檚听