section 1 - The American College Online Learning Center

12. Four percent is not the number.a. “The number” increases for a more globally diversified portfolio.b. “The number” increases if withdrawals start at a time when markets are nothighly valued.c. “The number” increases if the client can take small decreases in withdrawals (ifthe client is willing to adjust spending in tough economic times).d. “The number” increases if planners and their clients are willing to makeadjustments along the way (react to the environment around them).e. Planning Point: The portfolio does not need to solve all spending needs. There areother assets like Social Security, legacies, and the house that may help determinethe burden of the portfolio and consequently affect the safe withdrawal rate.13. The systematic withdrawal rate is not about how much we want to spend in retirement. Itis about how much of the retirement spending the portfolio is able to support. In otherwords, consider money from Social Security and other products.a. The portfolio needs to be connected to the retirement income puzzle.b. However, the portfolio does not need to solve all of the retirement income puzzle.14. There are three strands of spending literature that address the question, “How muchcan you withdraw from your portfolio in any given year?” (Video: What is the traditionalthinking about sustainable withdrawal rates? Tacchino, Woerheide, Milevsky)a. Historical Monte Carlo analysis (historical Monte Carlo analysis can lead to asustainability number)b. Forward looking Monte Carlo analysis (forward looking Monte Carlo analysis canlead to a sustainability number)c. Avoid Monte Carlo analysis, but look at the probability of sustainability(1) Calculating a probability without referring to Monte Carlo simulators15. Common themes in the literature:a. Asset allocation is 50 to 75% equity (fixed over the retirement period)b. A real 4 to 5% withdrawal rate appears to be sustainable(1) $1,000,000—take 4% in the first year ($40,000). One strategy is to justtake $40,000 a year.(2) Another strategy is to inflation adjust the $40,000 [$40,000 x (1 + inflationrate)](3) A “real withdrawal rate” indicates inflation adjustments occur.c. A difference between 4 and 5 percent (100 basis points) can have a big impactover time.d. One can justify withdrawal rates of 4 to 7.5% depending on how effectively theportfolio is managed.e. The value of the literature is that it educates people to dramatically reduce theirexpectations concerning the amount they can withdraw.f. Withdrawal rates depend on time horizon. The longer the time horizon the lowerthe withdrawal rate.g. Annuity, Social Security, and pension income all factor into what a reasonablewithdrawal rate is for the client.h. Planning Point: For some clients it is more difficult to spend money than to savemoney.6.11