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New Approach Allows Retirees To Control Their Own Pace For Portfolio WithdrawalsResearch in recent years has established rule-of-thumb “safe” portfolio withdrawal rates for retirees so their nest egg doesn’t run out of money. But an article in the August 2007 issue of the Journal of Financial Planning, published monthly by the Financial Planning Association®, offers a method for retirees to establish their own retirement withdrawal profile and then apply withdrawal rate rules that allow them to accomplish that plan. They’re in control instead of being held to a one-size-fits-all rate. Typically, an initial withdrawal rate is calculated that takes into account the projected length of retirement, such as 25, 30, or 40 years; the portfolio’s allocation; and the fluctuation of markets and inflation. The initial withdrawal rate, for example, might be 4 percent of the portfolio’s value at the time retirement starts. The initial amount withdrawn is adjusted upward for inflation each year, but the amount doesn’t change in real dollars. Some researchers have developed rules to boost an initial withdrawal rate as long as the retiree is willing to make withdrawal adjustments in later years to compensate for weaker portfolio returns or higher inflation rates than projected. Under these approaches, “withdrawal rates are defined and retirees are forced to fit their lifestyles to the resulting withdrawal stream,” writes William J. Klinger in his article, “Using Decision Rules to Create Retirement Withdrawal Portfolios.” “A more natural approach would be for retirees to specify their desired retirement withdrawal profiles and have annual retirement rates defined to produce each profile.” Klinger, co-author with financial planner Jonathan Guyton of a 2006 Journal paper on decision rules for withdrawal rates, defines three primary retirement profiles. Under the uniform profile, the retiree makes steady withdrawal amounts in real dollars throughout retirement. A retiree desiring to spend more money early in retirement and less in later years would choose an aggressive profile. A retiree wanting to increase withdrawal amounts in real dollars over the course of retirement would choose a progressive profile.
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