FREE NEWSLETTER
Go to main Forum page »
Everyone wants more security for their retirement savings, and outside of Social Security, the most reliable way to achieve this is often the much-maligned annuity. The main issue for many people is losing control of a large chunk of their retirement pot—they simply don’t like the idea. But what if you could get some of the security an annuity provides without giving up control of your cash?
No solution is perfect, but this idea might be of interest. I recently read about the perpetual withdrawal rate, a strategy that back-testing has shown will never run out of money. You could mentally set aside a portion of your portfolio and use the 2.5% perpetual withdrawal rate to act as a substitute for an annuity, possibly to fund your essential expenses. You would still have full control and full market upside, but with much more confidence in the money’s ability to last your lifetime.
You could then use a guardrail strategy for the balance of your portfolio to fund your wants. Research has shown this flexible approach can support a higher withdrawal rate than the original 4% rule. The result would be a portion of near-guaranteed income combined with a higher, more flexible withdrawal rate for your discretionary spending.
How would this work with the commonly used million-dollar portfolio example?
Imagine you needed an extra $10,000 of essential income beyond your Social Security payments. You could apply the Perpetual Withdrawal Rate (PWR) to $400,000 of your portfolio to generate this secure income stream.
Then, with the remaining $600,000, you could apply a dynamic withdrawal strategy, starting with a 4.5% withdrawal rate. This would provide you with a discretionary income of $27,000.
Combining these two amounts gives you a total of $37,000, or 3.7% of your original portfolio. While this is a small reduction on the traditional 4% rule, it is a mental accounting method that could allow you to sleep soundly during market turmoil without compromising future growth or surrendering control of your cash.
This dual-bucket strategy might offer a solution to the retirement income problem for some, providing psychological security while keeping full portfolio control. By separating needs from wants, you gain confidence during volatility without sacrificing flexibility or growth. The 2.5% foundation is historically durable, while dynamic discretionary spending captures additional returns. This idea could provide greater peace of mind than traditional strategies with more flexibility than annuities…. although I could be just talking out my a*s. Anyone got some thoughts?
Since 2010 the average annual price of the S&P 500 has increased from $948 to $5,981. That’s a remarkable increase and I have a concern that we have become complacent. “Investors’ appetite for risk may be what Gerald Wilde, a psychologist who died in 2019, called “homeostatic”: When the environment comes to feel safer, as it does in a long bull market, people’s behavior becomes riskier. (“You will probably drive faster in a big SUV than in a little tin can of a car,” he once told me.)” – Jason Zweig at the WSJ. In practice, this may occur as altering one’s allocation to favor a greater percentage of stocks.
If my portfolio was of a traditional make-up, without fixed income and bond ladders plus a large dollop of cash, I would be derisking in the current market. But as it’s not, I don’t worry.
Have you looked at Bill Bengen’s work or website? He’s he author of the 4% rule. He has a new book just out last month called “A Richer
Retirement, Supercharging the 4% Rule to Spend More and Enjoy More?
I was lucky enough to catch a podcast with him this week, Wade Pfau Retire with Style podcast 195, They also had him on a live Q & A for an hour this past Thursday which I see is on YouTube as well. Both were worth my time . if you look for him on YouTube hes making the rounds to promote his new book.
He thinks the 4% rule is likely too conservative and its more like a 5.5% rule perhaps with some guardrails around it for inflation and bear markets where one might adjust spending.
In the podcasts/ Q&A he says his most recent focus is on how portfolios with a higher stock allocation have preformed better over time. He seemed to be favoring a 65% stock allocation.
His website is pretty cool with all the tables and worksheets from the book to try and determine your own personal “SAFEMAX” withdrawal strategy.
I’ve read a lot about his work through other sites and articles. I never realized he had a dedicated site; thanks for the info.
In applying this I’m still nervous as these models haven’t ever experienced valuations this high and with the dollar weakening and debt continuing to grow plus how to account for inflation. I start to ask four of the most dangerous words in investing “Is this time different?” I’m looking closely at this to see what my asset allocation needs to be to have the best chances at “success” and Bill Bengens recent comments about higher stock allocations had a larger percentage of success in 85 % of all retirees (except for the ones that experienced sequence of returns with a bear market earlier in retirement).
There’s no easy answer. I couldn’t fathom the current markets either, and I’m very far from risk averse. I was nervous with valuations leading up to retiring in April and because of this decided to time segment the first ten years of my cashflow needs into assets decoupled from any potential volatility.
I’m fortunate to have the resources to do this but even decoupling a few years of assets would be better than nothing. My key priority was not having to sell equities at the worst possible times, when everyone’s panicking and markets are down 30%.
My remaining portfolio is at nearly 80:20 (pretty much in line with Bengens current thoughts) and I’m considering skimming the last 5 months’ capital gains and putting it into a money market fund, thus extending my ten year runway even further. With money markets still paying okay rates, it’s not like that cash is sitting there doing nothing.
My whole approach lets me stay aggressive with the growth portion since I’m not depending on it for near-term needs. I can ride out whatever craziness the markets throw at us without losing sleep.I hope my thoughts help with your dilemma.
If you haven’t already, you might enjoy diving into Karsten’s Safe Withdrawal Rate Series over at Early Retirement Now. He really gets into the weeds in evaluating different approaches, which isn’t for everyone, but I’ve learned a lot from him.
Thanks for the tip. I had a look this morning and my goodness, there’s a lot on his site! It will keep me reading for a long time.
His math skills dwarf mine, but he writes clearly and I’ve learned a lot from his website. He, along with Bill Bernstein would caution us against exceeding the 4% withdrawal strategy.
They dwarf mine, too! I can usually follow it to a certain point before the wheels fall off. Lol. But he explains his reasoning and conclusions in language that’s understandable. I especially appreciate his evenhanded critiques of different strategies (bucket, guardrails, etc).
Mark,
You present a very interesting proposal. Since you say this mechanism is back tested do you have a link you could post for an article in reference to this plan?
My grandson just showed me how to do this 😂
https://portfoliocharts.com/charts/withdrawal-rates/#:~:text=The%20green%20line%20tracks%20this,case%20for%20each%20retirement%20timeframe.
https://www.nasdaq.com/articles/with-perpetual-withdrawal-rates-your-money-can-last-forever#:~:text=This%20is%20the%20rate%20at,advantages%20to%20using%20the%20
PWR.
Thanks Mark. Thank goodness for smarter grandchildren and children. Next weekend my some is coming home to help mount and connect our new big screen TV.
Hope that big TV is included on your spreadsheet lol
Nope, I only count house and car values for calculating our net worth. I know furniture etc have value, but I don’t bother to put a number on it. Not worth my time.
The perpetual and dynamic withdrawal strategies have both been tested individually. The concept of synthesizing both into a combined strategy is just a product of my mind, with no research, as far as I am aware, currently available.
David, I’m a technology dinosaur and haven’t a clue how to do that, but I can give you this if it helps. If you launch a Google search, a lot more material is available.
“Decision Rules and Portfolio Management for Retirees: Is the ‘Safe’ Initial Withdrawal Rate Too Safe?” by Jonathan T. Guyton (2004)—Published in the Journal of Financial Planning. This is the initial paper that laid out the concept.
“Decision Rules and Maximum Initial Withdrawal Rates” by Jonathan T. Guyton and William J. Klinger (2006)—Also in the Journal of Financial Planning. This paper expands on the initial research, using Monte Carlo simulations to test the rules and determine the maximum sustainable initial withdrawal ra
tes.
Would Monte Carlo analysis be helpful?
I’m not sure what Monte Carlo simulations utilize for a withdrawl mechanism, but I doubt it utilizes Mark’s proposed procedure.
I thought your post was interesting, Mark, but thought of inflation and how you would handle that in your plan? Chris
Chris. Both the perpetual and dynamic withdrawal strategies have built-in inflation increases as part of their backtesting methodology—essentially the same procedure as used in the standard 4% SWR system. The dynamic guardrail system can, depending on the implementation, forgo the increase during market drawdowns. Correspondingly, during strong markets, the increase can be above prevailing inflation rates.
Thanks for answering, Mark. I will have to look up about the perpetual and dynamic withdrawal strategies. I know about the 4% rule and the bucket system, but haven’t read a lot about the guardrail system. Chris
Mark, as I read your post, there’s a pop up ad that is claiming 14% guaranteed interest from an annuity. Balderdash I say!
This 2 bucket approach could provide peace of mind, though bucket #2 could run dry at some point. Neither bucket is protected from creditors. Things like lawsuits and long term care could upset this applecart. Pensions, Social Security, and those dreaded income annuities can help in that regard.
Dan, as to your suggestion that the second pot might run dry, it’s been thoroughly tested and is much more robust than a standard 4% SWR system, with a higher likelihood of producing more income over a typical retirement lifetime.
Dan,
An Umbrella policy with sufficient coverage would protect you from most lawsuits. We have enough coverage to protect our basic net worth, ie portfolio, house and car values.
I agree. That’s the best protection that a couple hundred bucks per year can buy.
Dan, it just goes to show you, I shouldn’t let my mind do any thinking!