Guyton and Kitces with Continued Discussions on Safe Withdrawal Rates and Spending Decision Rules
Today we’ll continue the master course on systematic withdrawals with Michael Kitces and Jonathan Guyton. This post is a follow-up from a previous popular post in which Michael and Jonathan describe systematic withdrawals, time segmentation, and essentials vs. discretionary spending in retirement.
These video interviews are from the New York Life Center for Retirement Income at The American College, and all of these videos are included in curriculum for the Retirement Income Certified Professional (RICP) designation for financial advisors.
In this video, Jonathan Guyton and Michael Kitces discuss further about systematic withdrawals and safe withdrawal rates. Michael explains the origins of William Bengen’s initial research on the 4% rule. They also discuss the potential upside from using the 4% rule, the inclusion of additional asset classes, the role of market valuations in guiding the initial sustainable withdrawal rate, and the impact of variable spending on the safe withdrawal rate. Michael reminds that the 4% rule was never meant to be an autopilot guide to sustainable spending over 30 years. All of these factors suggest that spending could be higher than what is defined as a classical safe withdrawal rate. Michael also discusses the idea of the safe withdrawal rate setting a “floor” for spending, though this is a controversial statement (to say the least) for many advocates of floor-and-upside approaches, with the point being that investments designed to support a floor should not be invested in the stock market. Michael is describing the floor as supported by conservative spending instead of conservative investments, but the question remains about whether any spending rate is conservative enough when investing in a volatile portfolio.
In the next video, Jonathan Guyton discusses his research on using decision rules to guide withdrawals in response to portfolio performance when using a systematic withdrawal strategy. This involves a willingness to deviate from the standard assumption of inflation-adjusted spending. Adjusting spending for inflation will continue to be the norm, in order to smooth the spending path as much as possible, but his predetermined decision rules will guide retirees about when it is appropriate to make spending adjustments. The 4% rule applies only to the spending percentage in the first year of retirement. In subsequent years, the spending amount adjusts for inflation, and what this represents as a percentage of remaining assets in the portfolio will fluctuate over time. Guyton’s idea was to create guardrails on spending: cut spending by 10% if the current withdrawal rate (this year’s withdrawal divided by this year’s portfolio balance) increases by 20% from its initial level, and increase spending by 10% when the current withdrawal rate falls by more than 20% from its initial level. As well, an important implication of the research is that with a willingness to cut spending when markets underperform, it is possible to increase the initial spending rate above whatever has been determined as safe for constant inflation-adjusted withdrawals. The intuition for this is that cutting spending when the portfolio is down reduces some of the sequence of returns risk facing retirees using a volatile investment portfolio.
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