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by David M. Blanchett, CFP®, CLU, AIFA®, QPA, CFA, and Larry R. Frank, Sr., CFP®

Executive Summary

  • This paper advances the “second-generation approach” to the sustainable withdrawal rate question. The study evaluates the ongoing sustainability of the withdrawal rate that is revisited every year.  The withdrawal rate itself (not the dollar value) is increased, decreased, or stays the same based on the probability of failure for the remaining target distribution period.
  • This adaptive approach recognizes that sustainability decisions do not occur just once at retirement, but should change as situations warrant throughout retirement. To support ongoing sustainability decisions, annual probability of failure of the current withdrawal rate is presented in this paper, summarized in five-year slices through the data.
  • As a person ages, this allows for slowly changing to higher withdrawal rates  associated with those shorter remaining distribution periods. For example, a 15-year distribution period is more appropriate for an 80-year-old than for a 60-year-old retiree. Essentially, a person “ages through the data” from longer distribution periods to ever shorter distribution periods.
  • Revisiting the withdrawal annually allows for higher withdrawal rates if the portfolio performs well, for unplanned or unforeseen additional expenses, or for lowering withdrawal rates if the portfolio is underperforming. This is done through comparison of the current withdrawal rate to benchmark data to evaluate the associated probability of failure rates of a given portfolio mix and remaining distribution time.
  • The revisiting approach introduced in this paper is simpler than some of the complex decision rules that have been previously introduced, and is therefore easier to implement and change as the client ages and portfolio values change.

To read the entire article, CLICK HERE (PDF)

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