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Dynamic Retirement Spending Strategy

Safe Withdrawal From Your Investments In Retirement 

Today, let's talk a little bit about how much money you can safely withdraw from your nest-egg in retirement.  For years, I've read about different withdrawal strategies 4%, 3%, 5%, 6% there's a bunch of different methods, different ideas from studies done on  the past 100-120 years.  The one that makes the most sense to me is the dynamic distribution model which is based out of an initial study done by Jonathan Guyton and William Klinger.  This process has been introduced to me by my coach Matthew Jarvis so shout-out to Matthew, thank you. 

Dynamic Spending

With a dynamic distribution model, technically you can't run out of money because as the market (or your investments) keeps going down your monthly withdrawals will just keep getting reduced by changing percentages.  Obviously, you don't want to run out of money in retirement, but maybe you don't want to leave a lot behind either.   

Everyone has to realize we can't guarantee any method for sure, there are simply too many variables and too much going on.  Even though we can base these strategies off  these great studies, the future is still unknown.  

We're going to take the dynamic distribution model and we're going to combine it with the guard-rail process and if you're willing to follow a few rules, here's how it works: there's two things we don't know, we don't know how long your retirement is going to last (hopefully quite a while) and we don't know what the stock market is going to do.  Just like when you're driving your car down the road, there are guardrails if there's a sharp curve or a cliff, we're going to put guard-rails around your portfolio.  Hopefully it stays in the middle of the road but if it swerves and hits a rail, your investments get dinged up a bit but that is much better than going over the cliff, right.  

Withdrawal Rate

If you're willing and able to follow the rules, you can take out around 5% annually (the specific amount depends on your individual goals and your risk-tolerance).  We know the investments are going to go up and down but as long as it stays above the lower rail, we're good and we'll keep sending you your monthly amount.  If it drops below this lower guard-rail, then you have to be willing to tighten your belt a bit.  We're going to have to temporarily reduce your monthly distributions or withdrawals On the flip side if you break through the upper guard-rail,  you get an increase in income.  

War-Chest of Fixed Income and Cash

One of the rules with this process is we have to have a war chest of cash and fixed income to get us through the down times.  We don't want to sell  if the market goes down, we want to have a buffer of time for it to come back.  We're trying to avoid selling when everybody else is panic-selling.

Worst Time To Retire Since 1900

What year do you think was the worst year in history to retire?  Most people would say the Great Depression and this makes sense.  Things were pretty bad, right.  But it was actually 1973.  1973 was the worst year because the market was down and there was high inflation.  During the Great Depression things obviously went way down but only about two or three percent of people actually owned stocks  in the stock-market crash in 1929.  It continued to get worse when all the banks started to fail and everybody lost their savings.  There was also deflation because no one had anything to spend.  Everything went down and there was deflation.  In 1973 there was inflation and investments were  cut in half.  This was technically the worst time to retire.  If the guard-rails method was used during the period of 1973 and after, you would have hit the lower rail two to three different times causing two to three pay-cuts. 

For this to work, you have to understand  statistically and historically every one in three years, we're gonna lose money.  The market does go down (despite what's happened the last 10 years).  Actually, over the last couple years the market hasn't really done much.  Especially the last year and a half.  It's basically just bounced between a range of 20%.  

The dynamic distribution method is the one I think makes the most sense and it allows clients to have a good idea of where they'll be based on what they want to spend and what they currently have.

DECISION RULES AND MAXIMUM INITIAL WITHDRAWAL RATES by Jonathan T. Guyton, CFP® and William J. Klinger

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