Moving Beyond the Safe Withdrawal Rate in Income Planning.

YouTube yesterday put this 7 Golden Rules of Retirement Withdrawal Strategies in front of me.

And I am glad it did.

The topic around the 4% Rule or Safe Withdrawal Rate can be rather confusing but in this video Rob Berger basically arranged all the different stuff on retirement withdrawal and categorize them in an easier to digest manner.

Rob Berger is a long time financial blogger, podcaster, retired lawyer. In order to be able to arrange these things in greater context, you got to understand all the nuances of the things that surrounds the subject.

And I think Rob really understand it very well.

Rob decided to do this video as a response to Ben Felix video on the Sequence of Return Risk, and Safe Withdrawal Rate.

Ben Felix says there are flaws to the Safe Withdrawal Rate. He recommends to use a PMT strategy instead.

But as Rob points out, it is not so simple. There isn’t a best strategy.

In his video, Rob provides a 7-point list that I thought its very good that I decide to list them below.

I think if you are tired of hearing me talk about the safe withdrawal rate, and wish to hear someone who doesn’t use it as it is, then this video is for you.

1. Withdrawal Strategies are About a lot more than a Safe Withdrawal Rate (SWR)

1. Initial Withdrawal
2. Yearly Adjustments
   1. Inflation adjusted (the 4% Rule)
   2. No adjustments
   3. Adjustments based on age and/or portfolio balance (the RMD approach)
   4. Adjustments based on market performance
3. Asset Allocation / Rebalancing
   • Sequence of Return Risk | Ben Felix’s Sequence of Return Risk Video and why He Favors an RMD-like approach to address Sequence of Return Risk
   • Rising Equity Glide Path | Should Equity Exposure Decrease In Retirement, Or Is A Rising Equity Glidepath Actually Better?
   • Bond Tent | The Portfolio Size Effect And Using A Bond Tent To Navigate The Retirement Danger Zone
   • Bucket Strategy (Rebalancing) | Rob Berger’s Video that Bucket Strategy Doesn’t Eliminate Sequence of Return Risks.
   • Can I Retire Yet Article
     • Rebalancing Strategy – This is a common approach, though implementations differ. It uses the withdrawal as the means for bringing the asset classes back to the original, target allocation – 50/50 in my model. So, if the difference between the current holding of stocks and bonds is less than the withdrawal amount, the strategy brings them back to precisely the target allocation. If not, it gets as close as possible.
     • Last Year Performance Strategy – If stocks return more last year, this strategy withdraws entirely from stocks in the current year. If bonds return more, it withdraws from bonds.
     • 3-Year Moving Average Strategy – If the average of stock returns for the last 3 years bet the average return from bonds over the same period, this strategy withdraws entirely from stocks. Else it withdraws from bonds.
     • 7-Year Moving Average Strategy – If the average of stock returns for the last 7 years bet the average return from bonds over the same period, this strategy withdraws entirely from stocks. Else it withdraws from bonds.
     • CAPE Median Strategy

2. Applying any Withdrawal Strategy Requires Additional Information

1. Length of retirement | Shorter/later can accommodate higher safe withdrawal rate, longer/earlier you need a lower safe withdrawal rate.
2. Investment fees | SWR does not assume investment fees
3. Asset Allocation
4. Rebalancing
5. Chance of Success | Assumes you want 100% chance of success, which means you need to be rather conservative in your spending.
6. Taxes

3. There is no “Best” Withdrawal Strategy

1. Uncertain Future |returns, inflation, spending shocks
2. Different Goals | Die with Zero versus Bequest
3. Different Fears | Fear of running out of money versus fear of not spending enough
4. Different Assets | Social security, annuities, pensions, part-time work, retirement accounts, HSAs, taxable accounts

4. Every Withdrawal Strategy has Pros and Cons

1. Amortization Approach | The RMD or Ben Felix’s prefer approach
   • Pros
     • You won’t run out of money | based on your life expectancy
     • You might spend more
   • Cons
     • Wild swings in spending
     • May get to spend more much later in life
2. 4% Rule
   • Pros
     • Consistent spending
     • Very conservative
   • Cons
     • You probably don’t need or want consistent spending
     • Very conservative means you will probably underspend

5. The “Best” Strategy is Specific to the Individual

1. Spending as much as possible
2. Leaving money to loved ones
3. Security from running out of money (annuities)

6. Withdrawal Strategies are Just One Part of a Sound Retirement Plan

1. Social Security
2. Annuity
3. Pension
4. Part-time Work
5. RMDs
6. Dynamic withdrawal strategies (percentage of portfolio)
7. Static withdrawal strategies
8. Income strategies (interest & dividends)

7. Multiple Strategies are often Ideal

1. Social Security + RMD + 4% Rule
   • RMD of retirement accounts
   • 4% Rule of Roth and Taxable accounts
2. Social Security + RMD + Interest & Dividends
3. Necessary vs Discretionary Expenses
   • 4% for necessary expenses
   • Something else for Discretionary Expenses
     • Higher initial withdrawal rate
     • Percentage of portfolio
4. University Endowment Strategy | Perpetual Income Strategy
5. Spend Safely in Retirement | Rob Berger Do RMDs Beat the 4% Rule as the Best Retirement Withdrawal Strategy?

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