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Retirement Funds:
Will You Still Love Me Tomorrow?
A look at Otar’s Zones and Guyton’s Rules
Robert SchrammMKE Bogleheads
November 4, 2014
Zone Strategy 1. How much do I want?
Called Withdrawal Rate (WR).
2. Mr. Portfolio, How much can you pay? Called Sustainable Withdrawal Rate (SWR).
3. Mr. Insurance, if I give you all my money, How much will you pay me? Called the Annuity Rate (AR). Full CPI-Indexed Annuity
65 yr male$1,000,000AR: 5.3%
SWR: 3.8%
4.65% x 926,000 = 43,059
3.35% x 926,000 = 31,021
Annuity Rates (AR)age 60 age 65 age 70
Male 4.65% 5.30% 6.30%Female 4.25% 4.80% 5.80%
Joint 3.85% 4.30% 5.15%
Sustainable Withdrawal Rates (SWR)
age 60 age 65 age 70
USA 3.35% 3.70%4.25%
age 60 age 65 age 70
USA 3.35% 3.70% 4.25%
Annuity Rates (AR)age 60 age 65 age 70
Male 4.65% 5.30% 6.30%Female 4.25% 4.80% 5.80%
Joint 3.85% 4.30% 5.15%
5.8% x 385,000 = 223305.80% x 385,000 = 22,330
4.25% x 385,000 = 16,363
Conversion Numbers% Rate to Multiplier
Annuity Rate (AR) to Life Annuity Multiplier (LAM)
AR 5.3% = LAM 20 100% / 5.3% = 20 5.3% x 20 = 106%
Sustainable Withdrawal Rate (SWR) to Sustainable Asset
Multiplier (SAM)
SWR 3.7% = SAM 27 100% / 3.7% = 27 3.7% x 27 = 99.9%
Mike Box
40,000 – 20,540 = 19,360
Red Zone Strategies
You must export risk
If Retired: Slow down withdrawals
Cut expenses Part-time work
CPI-indexed Annuity to cover inflation risk
If Working: Delay Retirement A few extra years might be enough to buy
annuity
Decision Rules and Maximum Initial Withdrawal Rates
By Jonathan T. Guyton, CFP, and William J. Klinger
Cornerstonewealthadvisors.com/files/08-06_Websitearticle.pdf
Guyton Withdrawal Rules
Portfolio Management Rule
Inflation Rule
Withdrawal Rule
Capital Preservation Rule
Prosperity Rule
Guyton Withdrawal Rules
Portfolio Management rules
If an asset class exceeds its target allocation, invest excess in cash.
Withdraw first from excess equities, then from excess bonds, then from excess cash.
Do not withdraw equity following a year of declining stock market.
Guyton Withdrawal Rules Inflation rules
Withdrawals increase by the annual rate of inflation, measured by the CPI, to maintain purchasing power up to a maximum of 6%.
There is no make-up for a missed increase.
Guyton Withdrawal Rules
Withdrawal rule
Withdrawals increase from year to year in accordance with the inflation rule, except there is no increase following a year where the portfolio’s return is negative and when that year’s withdrawal rate would be greater than the original withdrawal rate.
There is no makeup for missed increases.
Guyton Withdrawal Rules
Capital Preservation rule
For the first 15 years, reduce withdrawal rate by 10% if it would have risen by 20% over initial rate.
Expires 15 years before the maximum age.
This decreased withdrawal becomes the basis for the following year’s withdrawal.
Guyton Withdrawal Rules Prosperity rule
In years with a withdrawal rate more than 20% below the initial withdrawal rate, the current year’s withdrawal rate is increased by 10%.
Other decision rule in effect are applied to this increased amount.
This increased withdrawal amount becomes the basis for determining the next year’s amount.
Guyton Withdrawal RulesProsperity Rule Example
Year Inflation WR Withdrawal Account Balance
Start 4.00% $ 20,000 $ 500,000 1 3.00% 4.12% $ 20,600
7 3.00% 4.92% $ 24,600 $ 820,000
24600 / 820000 = 3%
4% - 20% = 3.2%
4.92% + 10% = 5.41%
7 new 5.41% $ 27,050
Decision Rule Summary
Condition: Prior year ‘s return is
negative Current WD rate w/I 20%
of initial WD rate Current WD rate > initial
WD by 20% Current WD rate < initial
WD rate by 20%
Action: Apply Withdrawal Rule Increase prior year WD
by CPI Apply Capital
Preservation Rule Apply Prosperity Rule
Guyton Withdrawal RulesConclusions
Withdrawal rates of 5.2%-5.6% sustainable with 99% confidence with 65% equities.
80% equities provides greater purchasing power with lower success rates.
50% equities drops maximum initial withdrawal rates as low as 4.6%.
Aside: 65yo couple 17.6% probability of 30 years- life expectancy just under 24 years.
http://www.retirementoptimizer.com/ Jim Otar’s site for his book and sample his retirement program
http://cornerstonewealthadvisors.com/files/08-06_WebsiteArticle.pdf Guyton and Klinger’s decision rules and withdrawal rates
http://
www.forbes.com/sites/lawrencelight/2014/04/24/how-to-withdraw-your-retirement-money/ Article and sample link to a Withdrawal Policy Statement
http://www.kitces.com/?s=annuities+versus+saf
Comparing annuities with safe withdrawal rates
http://assetbuilder.com/SCOTT_BURNS/HOW_TO_OVERCOME_FEAR_OF_REQUIRED_DISTRIBUTIONS?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Assetbuilder+%28AssetBuilder+Inc.%29 Using RMD’s as a way of annuitizing retirement income. Links to RMD calculators.
http://www.bogleheads.org/wiki/Required_Minimum_Distribution_vs_annuitization A look at IRA minimum distributions in the light of annuities.
http://www.bogleheads.org/wiki/Safe_Withdrawal_Rates Considerations of safe withdrawal rates
http://www.esplanner.com/ Economic security planner from
Lawrence Kotlikoff (Try free version)
http://firecalc.com/ Retirement Calculator