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I’ve always been interested in retirement account alternative withdrawal strategies. Different strategies provide different outcomes. Some support higher initial spending rates, others leave larger amounts for a legacy. There is a middle ground with higher initial rate, and modest remaining amount.
RMD (Required Minimum Distribution) is an often discussed method of withdrawals from retirement accounts. There are others and Morningstar is publishing a series on nine different approaches. These range from simple to complex. “The best retirement withdrawal method depends on what’s most important to you.” The articles look at differing approaches with can support different withdrawal rates. Some prefer a higher initial rate, others prefer leaving a legacy.
This is a summary of one of the articles. It is available on the website and I’ve included a link at the end of this port.
The three methods in this article allowed for higher spending rates at the beginning of retirement, higher than the “base case” which has a 3.9% starting safe withdrawal rate.
The purpose of this specific article was to see which methods could support the largest payout over a 30 year period. As usual, the methods provide a 90% certainty using the data. The methods have different withdrawal rates and leave different balances at the end of the 30-year period. Alternately, Morningstar also looks at strategies to maximize your legacy.
The popular “4% Rule” approach Is based on historical stock and bond data from 1926 to 1976, emphasizing downturns in the 1930s and 1970s.
Morningstar “used forward-looking return and volatility assumptions to test 1,000 hypothetical return patterns over a 30-year period.” Each strategy was tested to estimate the starting safe withdrawal rate that would have supported spending over 30 years with a 90% probability of success.
There were three strategies which maximized lifetime spending. The portfolio began with $1 million in savings:
Probability based guardrails ($1.55 million lifetime spending)
RMD ($1.50 Million lifetime spending)
Guardrails ($1.36 Million lifetime spending)
Each strategy allowed higher lifetime spending and “the built-in flexibility of all three of these methods allowed for higher spending rates at the beginning of retirement compared with our base-case starting safe withdrawal rate of 3.9% of assets.”
Initial withdrawal rate:
Probability based guardrails (5.1% initial withdrawal)
RMD (4.7% initial withdrawal)
Guardrails (5.2% initial withdrawal)
Maximizing lifetime spending involves drawing down assets at a faster rate, which in turn leads to less money left over at the end of the 30 years:
Probability based guardrails ($230,000 remaining)
RMD ($120,000 remaining)
Guardrails ($700,000 remaining)
https://www.morningstar.com/retirement/heres-how-you-can-spend-more-during-retirement
Isn’t this a bit of the cart before the horse? I assume before people retire they know what they need to live on for all purposes, including saving, emergency spending, etc.
It is also significant if the withdrawals are taxable or not. Factor in say 3% for inflation.
Don’t you now have the amount you need to withdraw? That means what your goal is how much do you need to accumulate to meet that need.
That seems a priority over having what has been accumulated dictate how much can be spent in retirement.
It would be nice to end retirement with a balance, but is that a priority goal?
Wouldn’t it be nice to live on an annuity plus earnings on your investments and not worry about other withdrawals?.
When you think you know what you need in retirement you must then decide if the withdrawal rate will deplete savings within a lifetime. No one wants to run out of money in retirement. Allegedly the median household savings age 65-74 is $200,000. When retirement arrives, by choice or necessity, it may be necessary to make a difficult decision, such as drawing more to sustain a lifestyle and/or trimming expenses. For anyone with sufficient savings simple RMDs may work. For those who lack savings, different withdrawal approaches may provide a solution. This is especially true if one has limited savings, but wants to leave a legacy. Some may argue that HD readers are enlightened and have sufficient savings. I don’t know what’s typical for a reader.
Once you know you have what you need, it’s good to know how much more than that you can spend.
I look at that as one and the same. I live on a pension. I knew when I retired and I know now what I can spend – needs or wants, it’s limited to the net pension.
When I read articles about withdrawal rates and I look into it I run into an issue. Most calculators starts with a certain dollar amount. Can you recommend to me some free calculators use to include multiple pensions and retirement accounts
I use Boldin which I recommend as a very good full featured financial planning product. It can handle all of the options you mention and so much more.
It has both a crippled free tier, and a paid tier that currently costs $144/year. But there is a 14 day free trial for the full featured version.
I’ll look into it, thank you
I also use FireCalc.com which allows the entry of three pensions, your social security and your spouse’s. I also like that it allows customization of portfolio allocation. I’ve been using it for 20 years.
I think FICalc is a good start. It lets you enter multiple income streams starting at different time periods and performs Monte Carlo simulations on your inputs.
Thanks, I’ll give it a try
It (also?) uses historical data, not sure about Monte Carlo.
Randy, great catch. I stand corrected. You’re absolutely right; FiCalc uses historical backtesting rather than Monte Carlo simulations. I think it’s still a great little tool and worth the time running your numbers through it.
I know that I am risk adverse but I’ve never understood why these approaches only have a 90% probability of success.
Actually. this is widely misunderstood… They have 10% probability of adjustment. Not failure.
These tools can provide 100% probability of success. 90% is used because it provides a conservative high confidence result without the “sacrifices’ necessary to reach 100%. Aiming for 100% may require underspending or over saving. When I run these simulations I adjust the initial withdrawal amount to achieve 90% and then again to see what is required to achieve 100% success.
Using Firecalc a 100% success rate was achieved with a portfolio initial withdrawal of $35,000. 92% was achieved with an initial $43,000 withdrawal. Of course, different portfolio compositions alter the results.
Yep, a 10% likelihood of failure doesn’t seem like a great plan.
Keep in mind that these models can be run from time to time while in retirement. Because my spouse is younger i began with a 40 year spending duration. 10 years later I ran the model again with a 30 year duration. Rerunning periodically with the current portfolio value provides an updated projection and the opportunity to change the withdrawal amount in that year.
Except there is actually no fool proof (ie true 100% probability of success) withdrawl mechanism. Also going higher than 90% has been shown to lead to significant under spending, and leaving huge inheritances. This is fine if these are your goals, but for those with smaller portfolios it can lead to spending so low it can limit the enjoyment of retirement
I suspect there are nearly as many spending strategies as there are opinions on them. I enjoy reading about the “official” approaches developed by the financial industry, and they’ve definitely informed my thinking. But I’ve chosen to forge my own path with a unique solution. I suppose in thirty or forty years I’ll know whether it was successful.
Mark: I agree with your comments about spending strategies and like you, have my own take on that issue, but probably not for as long as your 30-40 year horizon. As other writers note from time to time, I have a firm understanding of what we bring in, what we save, what we spend, and what “large” expenses may be coming in future years. So long as revenues exceed expenses, we have pretty much free rein on spending what we’ve worked to accumulate. My wife will begin receiving social security in February which will increase our savings or allow for additional spending. It is certainly nice to be in this situation rather than having to watch each penny spent!
I might be fooling myself with a 40-year horizon, but optimism has its place! Later this year, my wife will be able to claim one of those increasingly rare, gold-plated, government-provided traditional pensions—complete with full retail-adjusted COLA and survivor benefits. That should make our retirement spending even smoother than it already is.
Let’s hope you do 😁
lol