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The 4% Solution | Financial Planning
Several of the comments to my article, Risk of Ruin, in addition to those posted here, focused on my "mistake" in using a flat dollar amount rather than a 4% withdrawal rate and one even faulted me for increasing the withdrawal rate by a 4% rate of inflation.
As if the purpose of the withdrawal was to preserve capital rather than to provide food, shelter and clothing in an inflationary environment.
My theory was simple. I figured $10,000 plus a Social Security benefit was the minimum that would keep a person alive, though perhaps not enjoying it -- regardless of the starting value of the portfolio. Was I being extravagant? Apparently some readers thought I was.
But the real point of the article was the impact of the sequence of annual returns once you start taking distributions. (As well as the danger of looking at past returns as the template for a financial product illustration, such as an annuity.)
As reader Ken commented, "Your point about showing returns from 1987-2003 vs. 2003-1987 was a real eye-opener. It helps [me] realize those things that really affect an account as you begin to draw it down."
And while some were critical of my reference to tactical asset allocation -- seeing it as "market timing" -- I felt great reading this comment from Roger:
I enjoyed your article about timing of withdrawals for retirees. A group of my peers that I worked with, creating and evaluating proposals and assessing the risk, have been observing the importance of timing caused by compounding as we approached retirement. We coined the term "Income De-Averaging" for those that make regular/periodic withdrawals of their retirement funds. You just amplified our observations of how costly that is. . .
I have been retired for nearly 5 years and learned quickly to move some of my investment gains to less risky investments (like money markets) to save for a rainy day when riskier investments go very negative as they will. I also try to time/set aside my savings for major spending (cars & trips) to coincide with those highest gains. While that doesn't get the very most gains possible, I'll take 50-85% of possible gains and take small losses. I want to enjoy my retirement while having a higher probability of having funds later, by leveraging the compounding.
What Roger is doing may sound like market timing to people still in the accumulation phase, but it makes sense to me. It is also the point I made in my book, The Joy of Stock Market Investing -- win by not losing.
And this leads me to a conclusion about all financial advice (i.e., rules of thumb, like 'never try to time the market.') All of that conventional wisdom is correct some of the time and none of it is correct all of the time. It depends on each individual's circumstances. The problem is that our financial advisory system isn't built to deliver that kind of service, except to those who don't really need it -- the people with million dollar-plus portfolios.
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©2008 Andy Mayo. All rights reserved | legal | sitemap | updated 08.20.08