317 Retirement Withdrawal Strategies

Sound Retirement Planning Podcast

In this episode Jason gives an overview of 7 withdrawal strategies for retirement income planning.

Below are resources for your continued education:

Rating: 4 out of 5.

4% Withdrawal Rule:
William Bengen on the 4% rule
https://www.fa-mag.com/news/how-much-is-enough-10496.html

https://www.investmentnews.com/an-update-on-the-4-rule-78016

https://www.forbes.com/sites/davidkudla/2019/11/15/how-the-4-rule-holds-up-a-quarter-century-later/#41b72b8e68af

Buckets:
https://www.morningstar.com/articles/840177/the-bucket-approach-to-retirement-allocation

https://www.forbes.com/advisor/investing/retiring-soon-and-scared-of-the-market-the-two-bucket-strategy-can-help/

https://www.morningstar.com/articles/330323/the-bucket-approach-for-retirement-income

Dynamic Withdrawals:
Guyton Klinger:
http://cornerstonewealthadvisors.com/wp-content/uploads/2014/09/08-06_WebsiteArticle.pdf

Vanguard Dynamic Spending:
https://personal.vanguard.com/pdf/goals-based-retirement-spending.pdf

Jon Guyton interview with Michael Kitces:
https://www.kitces.com/blog/jon-guyton-cornerstone-wealth-retirement-income-planning-guardrails-decision-rules/

RMD Method:
Morningstar Research:
https://investmentsandwealth.org/getattachment/90eb6376-d090-4904-9f82-786553ff5ed9/RMJ023-OptimalWithdrawalStrategy.pdf

Morningstar Research:
https://www.morningstar.com/articles/918416/should-your-withdrawals-mirror-your-rmds

Flooring:
David M. Blanchett, Ph.D., CFA, CFP®, is head of retirement research for Morningstar’s Investment Management group.
ttps://www.morningstar.ca/ca/news/187486/annuities-tips-and-planning-for-lifetime-income.aspx

https://retirementincomejournal.com/article/the-pfau-phenomenon/

Interview with Moshe Milevsky:
16:39 minutes – Consider annuities
21:21 minutes – How much in annuities
27:44 minutes – He owns two annuities
https://www.morningstar.com/podcasts/the-long-view/55

Transcript:

Announcer:        Welcome back, America, to Sound Retirement Radio, where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence, and freedom as you prepare for and transition through retirement. Now, here is your host, Jason Parker.

Jason:                   America, welcome back to another round of Sound Retirement Radio. I’ve got my mask on this morning. I don’t know if you can hear it or not, but I’ve got Emilia in here with me. We’re masked up, following the governor’s orders. You’re listening to episode 317, which is called Retirement Withdrawal Strategies, where you’ve got a verse that I’m going to share with you here. Also, we’ve got a joke that Emilia is going to share. Then I’m going to take this mask off, because Emilia will be departing the room. Okay. Here’s the verse for us, to renew our mind and start the show off. Right? 2 Corinthians 3:17 says, “Now, the Lord is the spirit, and where the spirit of the Lord is there is freedom. All right, Emilia, you’ve got a joke for us.

Emilia:                   I do. All right. Why did the secret service surround the president with dozens of cows?

Jason:                   I don’t know, Emilia. Why?

Emilia:                   They were trying to beef up security. There you go.

Jason:                   You guys got to know, before Emilia came in, she goes, “I don’t know if I should do this one. It’s about the president.” Emilia, I like that. Thank you.

Emilia:                   Well, you’re welcome. Have a great day, everyone.

Jason:                   All right. Thank you. 317 retirement withdrawal strategies. This is so important. Obviously, if you’re listening to this podcast today, you’re probably have retirement on the horizon, and you’re wondering if you’ve saved enough to be able to retire and to be able to maintain the same standard of living that you’ve grown accustomed to, and you don’t want to have to worry about running out of money in retirement. That’s what we’ve been teaching people about for the last 10 plus years on Sound Retirement Radio. But in order to do this, in order to make this transition into retirement, you’re going to need to decide on an investment portfolio withdrawal strategy.

                                In today’s show, I want to give you a high level overview of seven different strategies for you to consider. Then what I’m going to do in the show notes is I’m going to include links to additional articles, so that you can do a deep dive on the strategy that you’d like to research in more detail for your specific situation. Then, of course, at the end of this show, I’ll share a little bit more about the strategy that we do and that we use for a lot of the people that we serve, and why I like it, and why it makes sense. Some of this is going to depend on just how much you’ve saved. Obviously, the more you’ve saved and the lower your spending is, the more flexibility we have in how we structure this for you.

                                But before we start with the portfolio withdrawal strategies, there are four very important numbers that you’ll want to understand before you make the decision to retire. I can’t emphasize this enough. Now, of course, we have worked with people after they make the transition, and that’s okay. Sometimes it works out. Sometimes it doesn’t, but it’s always nice to be able to know this before you actually pull the plug. This is one of the biggest, most important financial decisions of your life. I highly recommend that you have a good plan before you decide to make the decision to retire. Here are the four things you really want to know.

                                How much do you plan to spend, and not only how much do you plan to spend, but ideally you want to be able to break down your spending between your essential and your discretionary expenses. The next part is how much are you going to have from guaranteed income sources, so Social Security, pension, annuity, income, money that’s in some way guaranteed? First is expenses. Second is guaranteed income. The third number that you’re going to want to understand is how much have you saved? You’re going to want to look at all of the different pots of money that you have out there. It’s always amazing to me. It always surprises me when I sit down with people and I ask them, “Well, how much does this all add up to?”, and a lot of people don’t know that number. Look at your 401ks, your IRAs, your Roth, your TSP, your bank accounts, your money market accounts, just any place that you have money that’s available for us to help supplement your income. Add all of those up.

                                Then the fourth number is we have to have some idea about longevity. This whole thing, I mean, the big concern most people have is they just don’t want to run out of money before they run out of life, and so we want to make sure that we have a really good income plan and that hopefully that income plan is going to be sustainable, not just for the first 10 years of retirement, but that you don’t have to go back to work in retirement. Nobody wants to be 75 years old. I always hear people say, “Jason, I don’t want to be greeting people at Walmart at 75 years old.” Of course, Walmart doesn’t even offer greeting positions anymore.

                                Anyways, once you’re armed with the most important numbers, you’re then going to need to decide on a strategy for taking withdrawals from your investment portfolio, so that you can have the life that you want to live. I think it’s really important to remember, as you’re making this transition into retirement, what the most important thing is. The most important thing is cashflow. Right? We’re not in accumulation mode anymore. It’s not about the highest rate of return. It’s about how can we live comfortably? How can we have the lifestyle that we want? How can we spend our time with the people that are important to us and not have to worry about running out of money and not being worried, so fearful that when volatility hits, that you’re not able to sleep at night, because there’s a lot riding on this and you just don’t want to make a mistake.

                                A few common concerns people have as they’re trying to understand if they’re going to be okay is are as follows, or at least this is what I hear from a lot of people. Number one, will stock market, will equity returns be as going forward as they have been in the past? Right? Because what we’re trying to do is we have to make some assumptions about rates of return and how your money’s going to work for you. In an environment like we’re in today, where stocks by most people’s estimates, are fairly valued and somewhat expensive, can we expect the market to give us the same type of returns going forward on stocks as we have in the past?

                                Then the second part to that question is, of course, given the current interest rate environment, how will allocating money to bonds impact your asset allocation decision? The bond environment’s pretty tough right now. Last time I looked, yesterday, the 10 year treasury bond yield was less than 1%. I think it was like about 0.7%. Obviously, the reason that most people hold bonds in their portfolio is to reduce volatility in the bad times and also to provide some income for the portfolio, but a lot of these strategies we’re going to talk about are based on how asset classes have performed in the past, and that’s the data that they use to inform the decision. As we look through these seven different portfolio retirement income strategies, you have to understand that the research is done based on past performance of asset classes, so we need to be thinking about how they’re going to be going forward.

                                Then the other question that people are asking is with interest rates so low, is this the right time to consider annuitizing a portion of my retirement investments for guaranteed income? One thing that people consider when they get into retirement is using an annuity for guaranteed cashflow, but as many of you know, annuities, I mean, insurance companies, they’re essentially buying bonds, and they use treasury bonds for a very stable portion of their bond portfolios. Then, of course, they have corporate bonds. In many cases, if you’re thinking about buying an annuity, you can do some research to understand what the financial strength of the insurance company is, and oftentimes when they’re doing those analysis of the financial strength of the company, they’re looking at how diversified the company is, but they’re also looking at the underlying holdings that the company has. How secure, how confident are they in those bond positions that the insurance companies are buying?

                                Here are the seven strategies that we’re going to discuss. Then at the end I’ll share with you my favorite combination. I think it’s important to recognize it doesn’t have to be all or nothing. In fact, you will hear in some of these different strategies there’s kind of a mix and match. The bottom line is everybody’s trying to figure out the best way to get cash flow, so here are the seven. Number one, the 4% rule. Number two buckets. Number three, dynamic spending. We’ll look at two different dynamic spending strategies. The first one is the Guyton-Klinger white paper. Then we’ll also look at the dynamic spending that the paper that Vanguard did. Then we’re going to look at the RMD method. We’re going to look at a flooring concept and then the idea of never touching the principle. Those are the seven different strategies that we’re going to review in today’s podcast.

                                We’re going to start way back at the beginning. The research on the topic of how much can you withdraw from an investment portfolio started with William Bengen, who developed what we now call the 4% rule, which was originally created in the late 1990s. The way it works is pretty simple. At the time of retirement, you calculate 4% of your portfolio, and that becomes the first year withdrawal. Then you increase that initial dollar amount every year for inflation. It’s pretty simple. If you had a million dollars, $1 million, and you’re pulling the plug, you’re ready to retire, you’re going to say, “Okay. 4% of $1 million is going to give you $40,000 that first year.” Then every year you’re going to increase your withdrawals for inflation.

                                William Bengen’s research was originally done in the 1990s. He was looking at a 30 year retirement, 30 years of being retired. He wanted to know, what was the withdrawal rate that you could take out of the portfolio and have the least likelihood of depleting the resources down to zero. He subsequently updated his research, where he included some additional asset classes, and he later concluded that the 4% withdrawal rule, when you include these different asset allocations in the investment strategy, could be as high as 4.5%, but everybody remembers the 4% rule. Another way that people sometimes refer to this is the dollar plus inflation. You figure out what the dollar amount is based on this 4% rule, and then every year you increase that dollar amount for inflation. In the show notes, again, I’m going to include a couple of different research articles on this, some of which were written by William Bengen himself. If you are interested in looking at why a 4% withdrawal rule, oftentimes called the safe withdrawal rate, may be a strategy that you want to consider, we’ll include that in the show notes.

                                The second strategy I want to talk about at a high level is a buckets. Many of you know if you’ve been listening to this show for a long time, this is a strategy that I like a lot. I like it, because it’s intuitive to the way that people think about money. Dave Ramsey, he does the envelope system. He teaches people the envelope system from budgeting. What the envelope system does is it has you allocate money to different resources at the beginning of every month, and then you spend from those envelopes. Obviously, Dave Ramsey is not the first person to ever do this, but I think it’s just intuitive to the way that many of us think about money. We kind of segment it based on when we’re going to use it.

                                Essentially, the bucket strategy says to diversify your money over time segments. At least That’s the way that I like to think of it. The idea is the money you need in the short term is conservative and that’s the money that you’re going to be pulling, withdrawing from, and then that money that you don’t need for many years down the road can be invested more aggressively. One of the things you’ve probably heard me say is that time is the cure to the volatility of the stock market. The more time you have, the more risk you can afford to take, at least the idea is the more risk you can afford to take before you need to touch the assets. Some people will refer to this as asset and liability matching. The liability is the spending. That’s the money that you need in the short term. The assets to support the spending would be invested more conservatively, whereas the money that you don’t need for 10 years from now, we can afford to be more growth oriented and take more risk with those assets, because we have more time on our side.

                                Obviously, depending on who you’re working with, different people feel differently about how many buckets you should have. Oftentimes when we’re creating structures for people, there will sometimes be three or four buckets. I know Harold, Harold Devinsky is considered the pioneer of the bucketing approach, and he really likes a two-bucket strategy. Christine Benz, who is Morningstar’s director of personal finance, she’s written quite a bit about using a bucket approach for retirement cashflow. In the show notes, I will include some articles to both some interviews with Harold Devinsky, as well as Christine Benz.

                                Again, if you’re looking to implement something like a bucket strategy, where you’re diversifying your money based on when you’re going to need it, so the money you need in the short term is more conservative, the money you need in the long-term can be invested more aggressively, there will be some additional resources for you to learn about this. Then, of course, for those of you that are using the retirement budget calculator, we actually have a buckets tab within that tool that allows you to envision how this might actually work for your specific situation, because the retirement budget calculator is very, very granular about your spending and when that’s going to happen. That’s one of the key features of the retirement budget calculator.

                                This next one is going to get a little bit more complicated, and this is one of the dynamic or flexible spending strategies. We’re going to start with what’s called the Guyton-Klinger, sometimes referred to as the Guyton-Klinger guardrails. Then after that dynamic strategy, we’re also going to look at a white paper that Vanguard put out for dynamic spending. The idea with a dynamic spending or flexible spending model is that you start by possibly … and this is why I think a lot of people are attracted to a dynamic spending model, is that you may possibly be able to take more money from a portfolio initially than you would under something like William Bengen’s 4% rule. Instead of starting with maybe 4% or 4.5% percent, if you’re willing to be flexible about potentially reducing your income in the future, then maybe you can start with like a 5% or a 5.2% initial withdrawal rate, and that’s really attractive to a lot of people.

                                I think one of the reasons that this also is attractive is because it really mimics this idea that most people want to spend more in the early years of retirement and less in the later years, but this gives us a framework to work within and to help us understand. Again, it helps you spend maybe more than you would with the 4% rule, but for the additional income upfront you have to be willing to make income cuts in the future. Simply stated, you may start with a 5% withdrawal rate, and then in years when the market is negative, you would not increase your portfolio withdrawals, but years when the performance is positive, you would increase your withdrawals for inflation up to a cap. For example, the rule might say that your initial withdrawal rate’s 5% and if your withdrawal rate increases by more than 20%, so in other words, if you go from a 5% to a 6% withdrawal rate, maybe because of portfolio volatility, then this would be a time when you would need to reduce spending by a certain percentage, maybe 10% to stay within the state withdrawal strategy.

                                What`’s interesting is if you listen to Mr. Guyton talk about how they implement this in practice, he talks about creating different portfolios for people based on the purpose of the money. The example that I heard him give was he talks about having a bridge portfolio that would be more conservative, so maybe if you needed to be taking money out, because you’re delaying starting Social Security, you would have this bridge portfolio, and then you would have a discretionary portfolio. That would be for the extras, the extra things that come up, for any extra spending that may arise. Then you would have a core portfolio, where the regular annual withdrawals would be taken from. If you ask me, it sure sounds like it’s taking this dynamic withdrawal strategy and creating an overlay with what I would call buckets.

                                It’s essentially allocating money to different segments based on when you’re going to need the money, and then that money will be used for taking the appropriate amount of risk, based on the time horizon that the funds are going to be needed. Obviously, if we’re postponing taking Social Security and we’re going to need immediate withdrawals from the portfolio, the idea is that money would be invested more conservative. Again, kind of a bucket strategy on an overlay of this dynamic withdrawal strategy. In the show notes, I’m also going to include a link to a white paper, the Guyton-Klinger paper, so you can read more about how this works in practice.

                                One of the things I did here, and you’ll hear this too if you go back and listen to the interview with Mr. Guyton, is that he emphasizes how important it is to understand the difference between your essential versus discretionary spending, which just underscores the reason that I created the retirement budget calculator. One of the things we allow you to do there is we allow you to mark expenses as either essential or discretionary. That’s really an important component of anybody that’s doing retirement cash flow planning. This whole thing is about spending, so you’ve got to really have that number dialed in. Regardless of which strategy you implement, if your portfolio withdrawals are not enough to cover your spending, you’re going to have a problem. That’s why you need to understand your spending and your budget.

                                I’m going to give you an example of how I envision the Guyton guardrail system working. The hypothetical that I’ve created here is we’re going to say we’ve got a married couple, and they’ve decided that they are going to spend $70,000 per year starting out in retirement. We’ll assume that they saved $1.5 million across all of the different accounts that they have and that they’re going to delay taking Social Security until their full retirement age. In this case, it would be age 67. At 67, we’ll assume that they’re just going to have $20,000 a year of Social Security coming in. Again, these are all just hypothetical, made up numbers, so that I can give you an idea of what this might look like in practice. We are also going to assume that they retire at age 60. Because they’re going to retire at 60 and they’re not going to start that Social Security until age 67, we know at age 67 they’re going to have $20,000 a year from Social Security coming in. But for those years leading up to that, we’re going to need to supplement that extra $20,000 a year.

                                Of that 1.5 million, create this bridge portfolio. You take maybe $140,000, or maybe a little bit less if you’re going to assume some kind of rate of return on the money, but we’ll just call it $140,000. We’ll put it into the bridge portfolio. Then we’re going to take those. That money’s going to be invested more conservatively, and that is the money where we’re going to be taking this $20,000 a year out for those seven years until Social Security kicks in. That would be 140,000 of the 1.5 million would be allocated to the bridge portfolio. Then with $1 million in the core portfolio for annual withdrawals. The reason that we would do that is if we assume that they’re going to start out by taking 5% withdrawal rate and that they’re comfortable with a 65/35 investment portfolio, so maybe 65% stock, 35% fixed income, we can start with that higher withdrawal rate.

                                Then what that does is it leaves about $360,000 for a discretionary bucket. The idea with the discretionary bucket is that if something extra comes up, like an extra trip that they want to take or if the kids need bailed out, this is the pot of money that they would dip into for those extras, with the understanding that when the discretionary bucket’s gone, it’s gone. If the core portfolio performs better than expected, there may be an opportunity to replenish the discretionary bucket in the future, but there’s no guarantee that that’s the case. We know that we could pull from the discretionary bucket if needed.

                                Let’s talk about some of the rules within these Guyton guardrails. The initial anchor withdrawal rate assumes that the client’s comfortable with a 60 to 65% in equities. They may be able to start out as high as 5.2%, if they’re comfortable with that much of an equity asset allocation. If they’re only going to be comfortable from a risk tolerance standpoint with more of like a 50/50 asset allocation, then that would reduce that initial withdrawal rate down to 4.6%. Again, I’m just pulling this data from the white paper that will be included in the show notes, if you guys want to learn more about this. Again, the bridge portfolio determines how much is needed until Social Security starts in this particular example.

                                The core portfolio, we determine how much is needed to support a 5% withdrawal rate. Let’s say that you need $70,000 per year, but we know $20,000 per year is going to be covered by Social Security. This would tell us that we need portfolio withdrawals of $50,000 per year. Then we’d say a million dollars would be allocated to the core portfolio. If you’ve saved more than a million dollars, those additional funds would be allocated to the discretionary bucket. The discretionary bucket is what would be used for those extra expenses as they come up, because one of the things we know is that life happens. It’s never going to work the way that it works in a spreadsheet, and there needs to be some flexibility. That’s what the discretionary bucket does. Once the discretionary bucket is used up, the clients would know that there’s no more funds available for discretionary spending. They just have to stick with the core spending.

                                If returns for the year are negative, the rule say you freeze, so essentially you don’t increase your withdrawal from the previous year. If you had been taking $50,000, you continue to take $50,000. Negative market returns mean you freeze, unlike William Bengen’s research, where he says, regardless of market returns, you’re taking that 4.5% Per year adjusted for inflation every year. If your withdrawal rate goes up by 20%, then you reduce your withdrawals by 10%. If your original withdrawal rate was 5% withdrawal rate and then that withdrawal rate increases to 6% due to poor market performance, or maybe portfolio withdrawals, or a combination of both, that would be the trigger that you would have to reduce that future income. Again, it gives you the flexibility of having more income now, but the potential to have to cut those incomes in the future.

                                Then what you have to do is you have to monitor this probably every six months and look at your spending. Every six months, you look at your annualized withdrawals relative to your current portfolio value to determine that withdrawal rate. For example, let’s say you’d been taking $50,000 originally as agreed upon from the portfolio, and then the portfolio had fallen from $1 million to $700,000. We take that $50,000 divided into 700,000. It would tell us that withdrawal rate’s now 7.14%. because the withdrawal rates now 7.14%, this would be greater than the 20% increase in the withdrawal rate. Of course, that target was 6%. Now, you would have to make a reduction to your spending. Then if this happened again in the next six months from now, when you review the portfolio, you’d have to make another reduction in spending. In a year when returns are positive, then you get to get a raise for inflation based on the consumer price index, but there’s a ceiling. They’re going to say there’s always going to be a max amount. The largest the inflation increase would ever be may be 6%.

                                Now, I know it seems like a lot of moving parts in these things, and that’s why many people that look at using something like the Guyton-Klinger, they don’t do this on their own. Most people hire a financial advisor to help them understand all of these different rules and review the portfolio with them. But, in fact, if you do a search on this, somebody says, “Can somebody just explain to me how the Guyton-Klinger withdrawal rules work like I’m a five-year-old?” I think I saw that in a Boglehead post, because there’s a lot of moving parts here. One of the things that I heard Mr. Guyton say is he said, “if clients don’t ask for a raise of inflation, they don’t automatically just increase the inflation for withdrawals, unless it’s actually needed. CPI, consumer price index, is what you use to gauge inflation. The maximum inflation adjustment in any one year would be 6%. There’s no make up for capped inflation, so you don’t ever make up for it if there’s a year where it’s higher, and there’s no makeup for years when there’s no increase due to negative returns.” Whew. Boy, that was a mouthful.

                                That gets us to the next one. The next one that we’re going to talk about in terms of dynamic rules has to do with a white paper that Vanguard put out. Vanguard came up with this dynamic spending rule, and here’s how they explain it in the white paper. Again, I’ll include show notes here for you. “To implement the dynamic spending rule,” and this is a quote from the paper, it says, “a retiree calculates each year’s spending by taking a stated percentage of the prior year ends real portfolio balance. The retiree then calculates a ceiling and a floor by applying chosen percentages to the previous year’s real spending amounts, such as a 5% ceiling, so the biggest increase you would ever take would be 5%, and a negative 2.5% floor, or a negative 2.5% decrease. The results are then compared. If the newly calculated spending amount exceeds the ceiling, the spending amount will be limited to the ceiling amount. If the calculated spending falls below the floor, then the spending amount is increased to whatever the floor amount would be.” Again, whenever he’s trying to figure out bottom line is, how do we get the income out of the portfolio without depleting it down to zero, but trying to take out as much as possible early on? In the show notes, I’ll include links to both the Guyton-Klinger paper, as well as the Vanguard white paper on dynamic spending.

                                The next one that we’re going to look at is life expectancy, or this is what people would call the RMD rule. You would use the uniform life table, which assumes life expectancy and also adds on 10 years. If you’re taking required minimum distributions, the uniform life table is what’s used for determining required minimum distributions. Most of you know that at 72 you have to begin taking minimum distributions, and it’s based on the uniform life table plus 10 years, so they add 10 years to your life expectancy. This is a dynamic strategy in that you’re making adjustments for portfolio withdrawals based on life expectancy. Withdrawals you take in the early years would be lower, but as you get closer to death, the percentage of withdrawals would increase. However, it’s also based on the value of the account. Years when the account value has fallen would be reason for the withdrawals to be even lower, even though the percentage that you are taking may have increased.

                                The idea with the required minimum distribution is every year that you get older the percentage actually increases that you’re taking from the portfolio, but it’s based on the December 31st value of the prior year. There’s two moving parts within the RMD strategy. One is what’s the value of the portfolio? The other one is what’s the percentage you would take out? The percentage increases over time. Obviously, the problem people have with this is it causes you to spend less money in the early years and more money in the later years, and it’s kind of the exact opposite of what I hear most people telling me they want to do it. Most people want to spend more in the early years with the hope that they’ll be able to spend less in the later years. Of course, that hope is based on the fact that you’re not going to get clobbered with medical issues. I’ll include some show notes. There’s been some research done by Morningstar regarding this potentially being the optimal withdrawal strategy for not depleting a portfolio down to zero.

                                This next strategy I want to talk to you about is what I call flooring. It’s based on, you probably remember me talking about the sound retirement income score. I’ll give you kind of my simplistic way of looking at this, and then I’ll share with you what a professor of finance says about how he goes about determining how much of a floor you need. The idea of flooring is simple. first, you need to have a really good handle on your expenses. You’ll need to determine from your expenses what are essential versus what’s discretionary. Then you’re going to add up all of your guaranteed income. Let’s say the only guaranteed income you have is your Social Security income. Maybe you don’t have any pensions or you haven’t annuitized any of your money.

                                Once you have all of your essential expenses calculated and you understand your guaranteed income, you would divide your guaranteed income into your essential expenses. This is going to give you a score, a percentage score. If the score is lower than 80%, then you would buy guaranteed annuity income to increase the score to a minimum of 80%. If you fully funded the floor, then you could invest the remaining assets potentially even more aggressively than you would have otherwise, because you know that you’ve developed this baseline minimum spending that’s needed to cover your essential expenses, so that even if the investment portfolio falls all the way to zero, you know that your guaranteed income is enough to cover the basics needed. The basics are buying food, and paying for your electric bill, and putting gasoline in the car, whatever.

                                The nice thing about something like the retirement budget calculator, if you’re using that as a tool, is you get to decide what’s essential or what’s discretionary. If you think Netflix subscription is essential, then you mark it essential. If Netflix is something that could go away if you needed to reduce spending in the future, then you would mark it as discretionary. But I heard, and I’ll include this in the show notes too, but in a recent interview, Moshe Milevsky … and let me tell you a little bit about him, so that you understand a little bit about who he is before I tell you what his advice was. He served as a professor of finance at the Schulich School of Business at York University for the past 25 years. He’s written several books on investing and retirement income planning. He received his bachelor’s degree in physics at Yeshiva University, his master’s degree in mathematics and statistics at York University, and his doctorate in finance at York University Schulich School of Business.

                                In a recent interview, and I’ll include this one as well, this was an interview he was recently on Morningstar talking about, but he says, this is a quote from him, he says, “There are products out there that protect you, and that is the whole family of annuity products.” He says, that I think should be in the toolkit, in the discussion certainly, something you should investigate as you get into those years if you don’t have a lot of pension income already.” Then the interviewers in this Morningstar interview asked him, “Well, how much should you have in an annuity?” Yeah. He says, “The way that you answer this is you have to understand what of your balance sheet is pensionized.”

                                The way that he would have you do this a little bit more complicated than my sound retirement income score I just described to you, but here’s a quote. Here’s how he said he would do it. He said, “Add up all of the income sources you will receive over your lifetime, compute their present value, and then add that to your liquid assets, such as your 401k, your IRA, your taxable accounts. You would say, okay, that’s my total balance sheet. Then you figure out what fraction of the pension stuff is from the total balance sheet. If the fraction of pensionize assets is greater than 70 or 80%, then you don’t need an annuity. If the percentage that’s pensionized is less than 10%, then,” he says, “run quickly to an annuity sales person. You have to talk to them about annuities.” That’s a quote from Moshe Milevsky.

                                Then he goes on, and this was actually interesting, but later in the interviews he says that he owns two annuities, one of them with guaranteed lifetime withdrawal benefits, and he says the reason that he owns them is he says, “The reason I am a fan of them is they provide protection against market declines.” I’ll include some show notes here, so if you’re interested in a flooring strategy, just making sure you have enough guaranteed income to cover at least the basics of retirement, you can do a little bit more research on that strategy. We’re getting to the bottom of this thing. I know this is a long episode, but I just want to give you the tools, because you’re going to have to make a decision here. Maybe it’s not all or nothing. Maybe you’ll combine a couple of these different strategies.

                                This next one is just to live on the income and don’t touch the principle. I think there was a time for the generation that came before us, a lot of them had really good pension income and municipal bonds were paying a healthy yield, but in today’s environment, you have dividend yield on the S&P 500 that’s less than 2%. Depending on the yield on the bond mutual fund you have, you might want end up with, depending on whether or not your treasuries or if you have some corporates in there, maybe you’ve got a 2% yield on your bond portfolio. Of course, those are all over the map, so it really depends. That’s a conservative number. I don’t know if the kind of bond mutual funds you are buying have high yield junk bonds in them, which may increase the yield. We don’t really know, but what we do know is that the yields are pretty darn low in this current environment.

                                If you had a million dollars in the plan, and you just wanted to live on the dividends and interest, and you had this portfolio that had maybe a 2% yield, then that means that you can take out about $20,000 a year of income without touching the principle. The idea is the portfolio is going to fluctuate, it’s going to go up and down, but you’re only ever going to take the income out of the portfolio. You’re never going to touch the principal. Those are the seven different withdrawal strategies. That doesn’t take into consideration that you have to be mindful of which accounts you’re going to tap into first from a tax standpoint. Remember, it’s not about how much money you actually generate, but about how much income you get to keep after Uncle Sam gets their slice of the pie. It’s not just taxes you need to be thinking about, but healthcare premiums may be impacted by your modified adjusted gross income, and how much you pay for Medicare premiums can also be impacted by the amount of income you report on your tax return.

                                At the end of the day, you have to pick your strategy and stick with it. If you’ve saved enough, personally I like the idea if you can create a floor and then also create a bucket strategy, the floor is not going to protect you from inflation, but that’s where we would use the buckets for the discretionary spending and any inflation that could be covered. But some of you haven’t saved enough to be able to do all of that. Then it starts limiting our options and we have to make some pretty tough decisions. But whichever plan you implement, you want to make sure you stick with it. You don’t want to be jumping from one idea to the next. Discipline is an important attribute that many investors seem to forget about, especially in times of volatility. When it comes to having a good plan, I like this quote that says, “Your investment success is determined by your level of discipline and perseverance.” Let me say that again. “Your investment success is going to be determined by your level of discipline and perseverance.”

                                Just to recap, today’s show was to introduce you at a high level to seven different strategies for retirement withdrawals. The great news is that all of them are pretty close. Some of them have advantages. Some of them have disadvantages. In fact, I’d say they all have advantages and disadvantages, but what we have to do is figure out which one’s right for you. Again, they were number one, the 4% rule, number two, buckets, number three, dynamic spending based on the Guyton-Klinger paper, number four, the dynamic spending based on the Vanguard paper, number five, the RMD method, number six is flooring, and number seven is to only take out the interest in dividends and never touch the principle.

                                Anyways, you’ve been listening to Sound Retirement Radio. This is episode number 317, retirement withdrawal strategies. Remember, retirement is an exercise. It’s all about the spending. You have to understand how much is essential. You have to understand how much is discretionary. If you haven’t done that work yet of understanding those numbers, I encourage you to take a minute and check out the RetirementBudgetCalculator.com as a tool to help you really get your spending dialed in. Until next week, this is Jason Parker signing out.

Announcer:        Information and opinions expressed here are believed to be accurate and complete, for general information only, and should not be construed as specific tax, legal, or financial advice for any individual and does not constitute a solicitation for any securities or insurance products. Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, its representatives, or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to the claims paying ability of the company. Investing involves risk. Jason Parker is the president of Parker Financial, an independent fee based wealth management firm located at 9230 Bayshore Dr., Silverdale, Washington. For additional information, call 1-360-337-2701, or visit us online at SoundRetirementPlanning.com.

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