Asset Decumulation Strategies

In 2015, 51% of couples were concerned about outliving their retirement savings.

One of the greatest fears among retirees is that they will outlive their money. But longevity is only one of the variables that influence how long your money will last. Other factors include the rate of return you earn on your investments, the rate at which money is withdrawn and how inflation erodes your purchasing power.

Withdrawal Strategies While Maintaining an Investment Portfolio

• Bucket Strategy
• Systematic Withdrawal Method

Bucket Strategy

Assets are segmented based on purpose, risk level or time period. This strategy is simple to set up and easy to visualize. Financial planners and investment advisors have varying opinions regarding the amount of cash, fixed income and equities to hold. Our illustration is only one example. Work with your advisor to determine the best allocation to suit your circumstances.

Systematic Withdrawal Method

• Assets are maintained in a diversified portfolio
• A fixed percentage (3–5%) is withdrawn from investments annually (can be a combination of interest, dividends, capital gains and, if needed, capital)
• Fixing the withdrawal amount is a compromise between income needs, return estimates and projected life expectancy

Example

Jim and Brenda’s retirement portfolio is $700,000 (across multiple investment accounts). Their asset mix is 60% equities and 40% fixed income.

The assumptions are:

• 30-year payout period
• Average 6% investment return
• Income adjustment of 3% annually to offset inflation

Three withdrawal rates are shown below. Income could range from $21,000–$35,000 per year (indexed for inflation). If they take out too much, they may run out of money. If they take out too little, they may sacrifice their lifestyle. Professional assistance would help them identify a sustainable withdrawal rate.

Disadvantages

• The 4% rule of thumb may be too high for conservative investors.
• Periodic rebalancing is required.
• Cost: Commonly used by professional money managers and high net worth investors when low-cost institutional investment management can be implemented.
• No structure like the bucket strategy; viewing the total account may be overwhelming and result in overreaction when balances swing.
• Emotional reactions when equity holdings decline may compromise the method.
• When using target-date funds, investors must identify when the asset mix will reach its final, most conservative mix (at retirement or later in retirement).

No Simple Formula

Unfortunately, there is no simple formula for determining how much income you can take from your investments and not run out of capital. A common misconception is that your withdrawal rate should be based on your long-term expected rate of return. So, if you are projecting a rate of return of 6%, you can safely withdraw 5% a year and not run out of money.

This approach would be ideal if returns didn’t vary from year to year. All it takes is a couple of negative returns early on in your retirement and your capital may never recover.

If the same negative returns occur when you’re 90, they don’t have the same impact. By taking money out at a fixed percentage when returns are variable, you can end up withdrawing too much on a shrinking capital base and impairing your portfolio’s ability to recover.

Trinity Study - Four percent is a sustainable withdrawal rate that may survive various market downturns, assuming different asset mix combinations. 

Take Strategic Withdrawals

The dramatic drop in equity prices in 2008-2009 highlighted a troubling concern for people taking income from their investments. If there is a major downturn in the market, will taking income force you to sell assets at fire-sale prices? Not if your portfolio is structured properly. When you have a mix of asset classes (a balance of equities, fixed-income investments and cash), you can choose which assets to redeem and avoid selling those that have temporarily lost value.

When interviewing financial planners or meeting with your advisor, ask if he or she considers all of the variables to make sure you have a sustainable plan for withdrawals. A good planner should manage your money with a long-term focus to ensure it will last. When it comes to withdrawing income, it should be done in the least disruptive way possible while minimizing the impact of taxes.

While it’s reasonable to expect periods of market turmoil to occur during your retirement, if you follow a structured and disciplined investment plan, you shouldn’t need to drastically alter your income stream.

How Long Will Your Savings Last?

Use this calculator to help you determine how long you can periodically withdraw from an investment and how large your withdrawals can be before your money runs out.