Friday, July 09, 2004

FPA Journal - Contribution: Sustainable Retirement Withdrawals

FPA Journal - Contribution: Sustainable Retirement Withdrawals: "investors' sustainable withdrawal in retirement depends not only on expected real returns in the future, but also on the variability of returns, the planned withdrawal horizon, the willingness and ability to run out of funds before the planned horizon, and the desire to leave some wealth to one's heirs"

While I flat out refuse to be a financial planner (except maybe to family members), I have had several newsletter subscribers ask how much money can they take out of their retirement portfolio and what should they be invested in. My standard answers are "take out as little as possible" and "diversify". Now, I am not sure how much of help that is.

Fortunately Ahmet Tezel in the Journal of Financial planning comes to the rescue! Using bootstapping he looks at (A)how much diversification is needed (B) how much the investor can withdraw per year.

He concludes:
"To ensure a reasonable level of withdrawals from retirement funds, investors should"

"Diversify among large and small stocks, government bonds, and Treasury bills. Stocks, large and small, should be held in proportions as high as 80 percent to 90 percent of the retirement portfolio. Investors should invest 5 percent in Treasury bills and vary the long-term and intermediate-term government bonds allocations between 2 percent to 7.5 percent."

"For larger real withdrawal rates, 95 percent to 100 percent of the portfolio must be invested in large and small stocks, with odds of failure greater than 10 percent. There must be more flexibility to investors' spending plans in case of significant declines in the stock market if they wish to withdraw higher real amounts than indicated above.

All the methodologies assume that history provides a guide to the future. Any doubt about future trends being different from the past—such as that prospective equity risk premiums might be lower—would call for adjusting the inputs for all methods.
Including additional asset classes such as international stocks, TIPS, and annuities may improve the sustainable withdrawals."

or as I would say, diversify and take out as little as possible ;)

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