The Only Withdrawal Plan You Will Ever Need

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It seems like every other week we read here at Advisor Perspectives or elsewhere in the retirement planning media about the latest and greatest strategic withdrawal plan (SWP) to use to tap one’s savings in retirement. The new and improved strategy may be fixed, variable or a hybrid of the two. It may use a safe withdrawal rate. It may have guardrails, floors or ceilings. It may be a variation of the IRS required minimum distribution (RMD) rules. It may involve using the Excel payment (PMT) function. It may calculate a rate that retirees should “feel free” withdrawing, or it may be one of the many approaches that adjusts the 4% rule in some manner to supposedly make it better.

I call these approaches “rule of thumb” (RoT) approaches.

All of these RoT approaches miss an important point.

Your clients want to know approximately how much they can afford to spend each year and meet their financial objectives, not how much they can withdraw from their investment portfolio. There is only one SWP that financial advisors (FAs) should be using for their clients: If the client chooses to spend his or her spending budget for the year, the amount to be withdrawn from savings for the year should be equal to:

  1. The calculated sustainable spending budget (SSB) amount for the year, minus
  2. The total amount of income from other sources, expected to be received during the year (IFoS).

If IFoS is expected to be relatively constant throughout retirement in real dollar terms, it is possible that the sum of IFoS and the withdrawals based on one of the RoT approaches may produce a reasonable SSB for a retiree. An example of this situation could include a retiree whose only other source of retirement income is from Social Security (and the retiree has not chosen to defer commencement of such a benefit).

In situations where the retiree has sources of income that may be front-loaded, deferred or temporary (i.e., not expected to be relatively constant in real dollars over the entire retirement planning period (RPP)), the sum of the withdrawals based on one of the RoT approaches plus IFoS for a specific year may not result in a reasonable SSB. An example is provided below.

It is my understanding that most FAs already use the SSB minus IFoS approach to determine possible withdrawals for a year. This was a revelation to me. Of course this begs the question of why we see so much literature describing the next and best RoT approach, unless these approaches are primarily either for research purposes (where relatively constant real dollar IFoS is assumed) or for "media purposes."

In order to avoid misleading those FAs and DIY retirees who may believe that the best way to develop a reasonable SSB is to add IFoS to the withdrawals determined under one of these RoT approaches, we must make it clear that they have assumed relatively constant real dollar IFoS, and their approach may not produce a reasonable spending budget if IFoS is not expected to be relatively constant in real dollars over the retiree’s RPP.