section 1 - The American College Online Learning Center

However, planning can proceed accordingly for 30 years (or whatever thechosen time horizon) in a worst case scenario.(3) Take an initial withdrawal of the portfolio at retirement (e.g., 4 percent of$1,000,000, or $40,000 in the first year) and make that the “salary” for thefirst year of retirement. In each subsequent year continue using the 4percent guideline, but apply it to the ending year’s account balance. Forexample, if the portfolio value at the start of year 2 is $1,200,000, the clientwould take a $48,000 distribution…if it is $800,000, the client will takea $32,000 distribution. This is a variation from the traditional approach.Under this approach the payments are variable. They are not fixed fromyear to year but instead are linked to investment performance. Planningmust account for dramatic shifts in annual income separately.(4) Follow the methodologies in step 1 (e.g., take an initial withdrawal of theportfolio at retirement (e.g., 5 percent of $1,000,000, or $50,000 in thefirst year) and then adjust the $50,000 each subsequent year for inflationregardless of the current value of the portfolio. However, if the portfoliovalue is more or less than a specified value make adjustments to thepercentage withdrawn accordingly. In other words, the initial value isadjusted without “consulting” the current value of the portfolio on a year byyear basis unless that value triggers an adjustment. This is the methodsuggested by building on the groundbreaking research on the topic. Itallows for a larger initial withdrawal rate that would prove to be a fail-safemethod for 30 years because future withdrawals may need to be adjusted(up or down) based on future market conditions. Under this approach thepayments are fixed year to year on an inflation-adjusted basis. Planningcan proceed accordingly for 30 years (or whatever the chosen timehorizon) in a worst case scenario. However, adjustments to annual incomemust be made when trigger events occur.c. Create guidelines regarding which investments should be converted into income.Give special consideration to the tax implications involved.d. Build a bridge between “pool of money” and “stream of income”.e. Create annual income in retirement equal to the withdrawal rate, plus SocialSecurity, plus other income streams.6. Structured systematic withdrawals direct what the portfolio is meant to transfer intoregarding ongoing cash flows.a. Personal assets in a portfolio are only one of the pieces (fixed income options,pensions, Social Security, etc.).7. Bucket approach (also called age-banding and time-based segmentation)a. Instead of looking at the portfolio as a whole, break the portfolio into a series ofgroups.(1) Spending goals from ages 60 to 70. This bucket accounts for travel, etc.(2) Design a portfolio that meets that time horizon and goal.(3) Spending goals 70–80 bucket—invest this time frame differently(4) Spending goals 80+ bucket—invest this time frame differentlyb. Several different age bands are used.c. Each band has its own specific goals.d. Each band has its own time horizon.6.4