section 1 - The American College Online Learning Center

5. Since markets have varying outcomes and the worst-case may not happen, other resultscan occur:a. If you retire on the eve of the next great depression, you may end up spendingyour last dollar and dying. (Eek-out the 30 years of spending without money left.)b. The safe withdrawal rate centers on a worst-case scenario. If the clientexperiences an average scenario, he will earn an excess spread.c. Under the safe withdrawal rate of 4 percent, 96 percent of the time the client willhave their principle left over.d. Under the safe withdrawal rate of 4 percent, at the median level wealth isincreased by a factor of 1.6.e. The safe withdrawal rate research has often been misinterpreted to indicate thatclients need to save enough money to only draw down 4 percent per year adjustedannually for inflation. This may be extremely difficult for most clients.6. The initial modeling by Bengen assumed investing in only three alternatives (an S&P 500fund, an intermediate government bond fund, and Treasury bills). His later researchexpanded investment options. By adding small cap funds, the research evolved to say ifyou always want to get a raise for inflation and want to make the money last for 30 years,you can use a 4.5 percent withdrawal rate.7. A variation on systematic withdrawals examines how triggers which adjust the withdrawalrate impact the safe withdrawal ratea. Guyton’s research allows the initial withdrawal rate to be between 5 and 5.5percent as long as triggers are used to adjust the withdrawal rate.8. There are a variety of strategies that can move the “4 percent number” noticeably higher:a. Planners who are not adapting the “4 percent rule” may be forcing clients to liveon much less money than they can sustainably withdraw.b. Safe withdrawals are not an auto-pilot program(1) If the portfolio outpaces the withdrawals, the client can spend more. Inother words, if markets move favorably, spending can be increased.(2) However, if markets do not go favorably, the client’s money will last for30 years.(3) Setting and resetting floors is a desired part of the process. Plannersshould keep “ratcheting” withdrawals to adapt to the client’s changingcircumstances.(4) The safe withdrawal rate as adjusted, sustains the client’s standard of living9. Some planners use annuities to keep it so that the floor will not fall below what amountsto a decline in the standard of living for clients.a. Annuities give guarantees (better than the safe withdrawal rate)b. Annuities protect against longevity risk (the safe withdrawal rate stops at 30 years)c. The annuity leaves nothing at the end. The safe withdrawal rate approach getsboth a spending income and the potential to keep all the principled. The safe withdrawal rate secures the longevity side (not as well as an annuity)and it allows for preservation of principle and legacy options.10. Safe withdrawal rates target an income that will sustain standard of living for 30 years, butthere is an upside.11. Do not frame what the client needs to save based on the safe withdrawal rate. This is amiscalculation and misuse of the research.6.10