PWL Capital October 2, 2017 Advanced Investing Living in Retirement The Retiree’s Dilemma: The Deckards We illustrate a dynamic approach to retirement income planning that avoids some the pitfalls of traditional retirement planning. Like many retirees, the Deckards face the dilemma of how much they can withdraw from their savings during retirement. The Deckards are 62 and have savings of $1.4 million and are currently withdrawing $60,000 annually. Further details are in a white paper where we contrast a traditional fixed withdrawal, fixed asset allocation approach to retirement portfolios with a dynamic model. Most retirees have to deal with the following trade-offs: Spend more now versus run out of money later Conserve assets for the future but fear fate robs you of that future Take investment risk to grow assets but risk unrecoverable market declines Investment conservatively for fear of markets yet want to spend now while in good health. These trade-offs arise because of the uncertainties of future investment returns coupled with the uncertain length of retirement. Traditional retirement planning compounds these challenges with rigid withdrawals over the retirement period. The consequence is that, as retirement progresses, portfolio values tend to cluster around the extremes of either prematurely running out of money or leaving unspent retirement assets. In the Deckard’s case we show this can lead to 50% of outcomes falling into these two extremes. We show how the Deckards can be confident of not running out of money or leaving considerable portions of their retirement savings unused. To achieve this requires changing from a constant to a flexible annual withdrawal and to allow the asset allocation to stocks to change according to portfolio performance and likely lifespan. Source: PWL Capital The figure above contrasts the two approaches with the constant withdrawal, constant asset allocation represented by the orange bars and the dynamic approach represented by the blue bars. In each case we show the range of portfolio values after 28 years of withdrawals. The likely range of portfolio values with the dynamic strategy is shown by the blue bars. Even at age 90, they have a 71% chance of having between $150,000 and $300,000 of assets remaining, enough to fund a few more years of retirement, if needed. In contrast, the constant withdrawal, constant asset allocation approach has only an 11% of achieving this reasonable outcome, and a 28% change of having run out of money completely. The dynamic strategy trades off the possibility of leaving an unintended inheritance against the risks of running out of money without any loss in total income. In the Deckards’ situation, the dynamic strategy yields an average total income to age 90 of $1.579 million, slightly more than the average income from the constant withdrawal strategy of $1.575 million. Allowing annual withdrawals and asset allocation to flex according to market conditions not only makes intuitive sense, but also reduces the risk of failure. There will always be trade-offs when the goal is a steady income from a volatile asset, but our experience is that client’s value having a rational process that manages the risk of shortfall and is continuously updated throughout their retirement, with spending guidance along the way. Share: Facebook Twitter LinkedIn Email