From the Archives: Getting Going
Retirees Don't Have to Be So Frugal:
A Case for Withdrawing
Up to 6% a Year
By JONATHAN CLEMENTS
Staff Reporter of THE WALL STREET
Maybe you don't have to order the early-bird special after all.
Many retirees have trimmed their spending during recent years, and it
isn't just because of plunging bond yields and tumbling stock prices.
Instead, they have been reacting to dire warnings from Wall Street,
cautioning them that their portfolios can't sustain the sort of withdrawal
rates that used to be considered safe.
Feeling pinched? Don't resign yourself to a lifetime of scrimping and
saving just yet.
Boosting income. When advising
seniors about their spending, financial experts have grown increasingly
conservative. For instance, one influential study found that, if retirees
want to be confident their savings will last 30 years, they need to limit
their initial withdrawal rate to 4.1%, or $4,100 for every $100,000
But a new study by Minneapolis certified financial planner Jonathan
Guyton, which appeared in October's Journal of Financial Planning, suggests
retirees don't have to be nearly so frugal. He analyzed how to generate 40
years of income while surviving brutal market conditions, such as high
inflation and a steep market decline early in retirement.
His finding: Retirees may be able to withdraw as much as 6.2% initially,
provided they follow three rules. "There's nothing radical to this," Mr.
Guyton says. "It's just a matter of being street smart. These are things
you would sensibly think about doing after a tough year."
Before we get to the rules, you will need a little background. When
experts talk about withdrawal rates, they are typically referring to the
percentage of a portfolio's value withdrawn during the first year of
Thereafter, retirees are assumed to increase their withdrawals along
with inflation. Let's say you retired with $600,000, inflation ran at 3%
and you used a 6% withdrawal rate. In that scenario, you would withdraw
$36,000 in the first year of retirement, $37,080 in year two, $38,192 in
year three and so on.
Keep two things in mind. First, you will owe taxes, so not all this
money can be spent. Second, if you spend your dividends and interest, these
sums count toward the amount withdrawn.
Making It Last
Here's how to reduce the risk of outliving your retirement savings:
- Clamp down on spending if your portfolio
suffers a calendar-year loss or rapid inflation returns.
- Avoid selling hard-hit stock mutual funds.
- Invest part of your bond money in an immediate annuity that pays
- Favor low-cost funds, so you keep more of what you
Following rules. The strategy of
increasing withdrawals along with inflation works fine, provided the
markets and inflation are moderately well behaved. But if you get hit with
either rapid inflation or a devastating market crash, you can rapidly run
out of money, as you make larger and larger withdrawals from an
To figure out how to combat that risk while maximizing income, Mr.
Guyton analyzed two portfolios, one with 80% stocks and the other with 65%.
Both portfolios had the sort of well-diversified mix you could get by
buying large-stock funds, small-company funds, foreign shares, real-estate
investment trusts, bonds and money-market instruments.
He found that the 80% stock portfolio could support a 6.2% initial
withdrawal rate, while the 65% stock portfolio could start at 5.8%. But if
you adopt those lofty withdrawal rates and you want to be sure your money
lasts 40 years, Mr. Guyton says you need to follow three rules.
- If your portfolio loses money during the
year, you can't give yourself a raise the following year. In other words,
if you add up your portfolio's year-end value and the money withdrawn
during the prior 12 months and this sum is less than your portfolio's
beginning-of-year value, you can't increase your next year's withdrawal to
compensate for inflation.
- No matter how high inflation gets, your maximum annual increase
- You have to avoid selling hard-hit stock funds. Instead, each
year, start by lightening up on winning stock funds.
Suppose you had targeted 6% of your portfolio for real-estate investment
trusts and REITs have a good year. You would pare back your REITs to 6%,
funneling the excess into a money-market fund. This money fund, says Mr.
Guyton, should initially account for 10% of your total portfolio.
Next, "rebalance" your bond funds back to their target percentages,
again sweeping the gains into your money fund. The proceeds from
rebalancing, plus the cash already in your money fund, should cover your
What if it doesn't? Mr. Guyton says you should draw down your bonds even
further. As a last resort, sell more of your stock funds, starting with the
prior year's best performers.
All this, of course, is based on an analysis of historical returns. If
we get wacky markets, miserably low long-run returns or you incur hefty
investment costs, you may have to withdraw less than Mr. Guyton
Moreover, because the first and second rules will occasionally limit
spending increases, there's a chance that retirees who use Mr. Guyton's
strategy will receive less total income over 40 years than if they had
started with a lower initial withdrawal rate but got inflation increases
Still, Mr. Guyton's rules make a ton of sense to me -- and I suspect
many retirees will find his approach appealing. After all, they get a
decent amount of income initially and they may never see the downside,
either because they don't live long enough or because the markets prove
As Mr. Guyton puts it, "I wouldn't want to be the financial planner who
has to look an 85-year-old client in the eye and explain why he has so much
money and why he's had so little fun."