Investment Considerations for Your Withdrawal Portfolio PART 3

Our past few posts have talked about investment considerations for your withdrawal portfolio. Today we talk about withdrawal considerations.

What is an appropriate level for withdrawal from a variable portfolio in order to sustain the income being drawn over the long term? RIIA research has suggested the following in terms of withdrawal rates in relation to asset value:
Excess funding = <3.6 per cent
Constrained = >3.5 per cent < 7.1 per cent
Underfunded = > 7 per cent

This means that if the total withdrawals from your income-producing assets are less than 3.6 per cent,you actually have a situation where you have more assets than you need to create the income you desire. If you are drawing at a rate in excess of 7 per cent, then you are likely to find yourself in a situation where you are eroding your income-producing assets and eventually both the asset and the income being drawn from it will exhaust.

The range of 3.5 to 7.0 per cent is shown as “constrained,” which simply means that while it is very practical to have sustainable income at that rate of withdrawal, some vigilance is required. I have preferred using a withdrawal rate of around 5 per cent, indexed, which has proven to be quite resilient in the face of negative markets over the last 20 years. Tables showing the effect and impact of a 5 per cent withdrawal rate follow later in this chapter. I have gone up to 6 per cent with some clients, but only in certain circumstances.

It is appropriate to have a sustainable withdrawal rate in mind as you are taking your income. It can even serve as a guide to tell you if you have enough money to retire. If you are retired, it can provide some insight as to whether or not your investments will be able to sustain themselves at your current level of withdrawals. There are additional considerations regarding withdrawal rates and withdrawal models, including the ones below.

  • Everyone’s situation is unique. There are no cookie-cutter solutions.
  • Upon investigation, you will have a bias and/or preference for or against various solutions.
  • Advisors will have a preferred solution approach and bias.
  • It is an ever-evolving scenario that requires ongoing discussion and revision.
  • Problems also arise when mathematical theory confronts reality. That does not make having a model for withdrawal useless.

    It does, however, suggest that there needs to be a balance between certainty and flexibility. Some of the variables that complicate withdrawal plans include the following:

    • changes in health
    • death
    • change in marital status
    • taxation considerations
    • conflicting client objectives
    • changing client objectives
    • the annual “once in a lifetime” financial crisis that people often have

This is also why, when people are deciding if they can retire, it is not necessarily as simple as saying that you need to have a million dollars. Different retirement lifestyles are going to require different levels of income and different rates of withdrawal.

So a million dollars as a benchmark may be just right, not enough or far more than is necessary, depending on what the required withdrawals will be. That again is why determining lifestyle needs is the second step in this process.

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