Client retirement withdrawals come with sequence of returns risk: When and how clients drawdown their retirement savings can affectreturns in the long term, said MichaelKitces, blogger and head of planningstrategy at Buckingham Wealth Partners,who spoke in early November at theSchwab Impact 2020 online conference.
He provided three strategies for advisors to manage this risk for clients.
His presentation included examples ofhow clients can translate various bucketsof money — like 401(k)s, IRAs, pensions,annuities and Social Security — into“sustainable cash flow” over a 30-yearretirement period.
Obviously, one crucial factor is the typeof market in which they retire, Kitces said,
adding “the best time to retire is whenthe [price-to-earnings ratio] is low” — inother words, not today’s market.
1. Safe Spending Rate
This is the most conservative method.This is picking a withdrawal rate thatis conservative and sticking with it, nomatter how the market or inflation affectsavings. One problem: This methodcould be too conservative and leave mostof a retiree’s savings to heirs, Kitces said.
He showed a chart on spending ratewith 30-year sequences as far back as1871. The average “safe” rate was 6.5%,but Kitces notes that would have failed
50% of the time.
Most likely, if a savings rate is too low,the retiree will “lift spending,” Kitces said.
“I know there’s been a lot of discussion about whether the 4% rule is broken… but keep in mind the 4% rule was notbased on average returns; it was based onworst sequences we’ve had in 150 years.”
2. Dynamic Asset Allocation
This method looks at how a portfolioinvestment mix is adjusted. “In some way,shape or form, we change how our assetsare allocated in order to do this,” he said.One way to do this is to use “bucketstrategies,” which break up the portfoliointo different time horizon buckets, sothe first spending in retirement would beeither cash or short-term investments.Next after a few years would be bonds,which have some premium that can beused, and the third is stock dividends.“By definition, you won’t need to touchthe equity bucket for 10 years because ofusing [cash and bonds first],” Kitces said.Also, spending has to be divided byessential (food, clothing) and discretionary. Essential spending can be coveredby annuities that guarantee an incomestream for life, he added.
Stock returns can then cover discretionary spending, and shifting the portfolio mix toward more stocks as a clientages is an option. He noted stocks couldgo up for 30 years, or down for 30 years,“and in that case it doesn’t matter what
3 Ways to Manage Sequence of Returns
Risk in Retirement
The 4% rule is popular but may be too rigid. Here are some options to
better pace client withdrawals, according to Michael Kitces.
RETIREMENT PLANNINGBy Ginger Szala