Since we tend to live longer now, and
therefore spend more time in retirement,
the old question of how much to
take out from your portfolio is becoming more
and more relevant. Let’s assume a person
accumulated a nice sum of money through
participating in their 401k or other plans at
work. Now it is time to retire. He or she now
has a dilemma: How much to take from my
retirement investments, so that I don’t
deplete the principal? It could also be stated
as: What is the “safe” withdrawal rate from
my accounts, so that I don’t outlive my retirement
assets? Even a couple of hundred dollars
per month could make a tremendous difference
for the retiree. If he or she takes out
a small amount, it may impede their quality of
life. There may be less money available for
travel, medications, house maintenance, or
simply gifts for grandchildren. If the withdrawal
is too aggressive, the person will be
“dipping” into the principal and the portfolio
may not provide comfortable retirement for
too long. Finding the balance has been like
looking for the “golden bullet”.

There are number of financial instruments
that will generate income during your retirement.
Your retirement portfolio may consist
of stocks, bonds, mutual funds or annuities.
Each of these securities will in their own way
contribute to your income needs.
Stocks may pay dividends; bonds and other
fixed income instruments will yield interest.
Money management companies will report
the performance results in the form of “total
return”. Some will print them on the quarterly
statements you are receiving.

Older research suggested that 4% annual
withdrawal was the “safe” systematic withdrawal
rate from retirement accounts.
(Bengen 1994, 96,97). These results were
based on a portfolio of stocks only.
The newest data, recently published by
Jonathan T. Guyton (1) proposes that retirees
may withdraw more, without worrying about
outliving their funds, if the portfolio is properly
allocated. Guyton says that a rate may be
as much as 6% per year. More specifically, a
person has a chance of withdrawing 5.8%
annually from their portfolio for 40 years without
“dipping” into their principal if the portfolio
invests 65% in stocks. The greater the
allocation in stocks, the higher the potential
rate of withdrawal. Guyton’s research suggests
that an 80% allocation in stocks will allow a
retiree to withdraw 6.2% annually over an
extended period of time, without affecting
the account’s balance. Of course, it needs to
be a diversified portfolio containing large, mid
and small company stocks, as well as international
stocks and REITS (real estate investment
trusts).

Other planning techniques were also used in
research including:

-selling of assets that have appreciated over
the prior year and now take up larger portion
of the portfolio- than originally designed
-annual withdrawal in January of each year
-deciding which assets to sell or retain (assets
that lost value in the prior year were retained).
Guyton’s results propose that even retirees
may want to keep 65% of their portfolio in
stocks, if they need relatively high income
and want to preserve their capital over time.
Therefore, a $200,000 retirement account
allocated 65% in stocks hypothetically should
pay $967/mo without affecting the principal
over time (using the proposed 5.8% annual
withdrawal rate). What makes the results
more credible is that the researcher used particularly
“stormy” period of time in his
assumptions. They are based on the years
1973-2003. Those years include two separate
stock market crashes, one in 1973-74, and
another in 2000-2002. Let’s also remember
the high inflation in the 70’s.

Each of us has different financial goals, tax situation
and tolerance for risk. I wouldn’t recommend
the 65% or 80% allocation in stocks
to everyone in their retirement portfolio. It
is, however, a good starting point that will
help many planners and their clients in calculating
and projecting the retirement income
needs.

(1) Jonathan T. Guyton “Decision Rules and Portfolio
Management for Retirees: Is the Safe Initial Withdrawal
rate Too Safe?” Journal of Financial Planning, October 2004
This Material is not intended to replace the advice of a
qualified attorney, tax adviser, investment professional or
insurance agent. Before making any financial commitment
regarding the issues discussed here, consult with
the appropriate professional.