I've been modeling something similar to prepare for life in retirement, though I arbitrarily chose a three year look-back. Five years might make even more sense, so I'll add another column to my spreadsheet and ponder the results. My spreadsheet assumes a fixed percentage withdrawal up to age 75 and then switches to RMDs using the IRS RMD table (since no matter what my preference for withdrawals would be, the IRS regulations will tell me what to withdraw from my tIRA after a certain point.)During the BH conference, I learned that endowments are taking a totally different approach to their sustainable withdrawals.
Instead of SWR method, which is taking a certain percentage and adding an inflation adjustment every year, the claim was that endowments would look at the average portfolio value over the last 5 years, and withdraw 5% of that (no inflation adjustment). This seems to be a modified variation of the VPW withdrawal strategy, but seems like a reasonable middle ground:
1. While there is no explicit inflation adjustment, there is an implicit inflation adjustment because stocks usually outpace inflation.
2. As with VPW, the risk of running out of money is unlikely, as you are taking a fixed percentage off the portfolio (almost), so you can do this in perpetuity.
3. VPW main issue is fluctuations as the portfolio size changes, by taking the time-averaged value, you are smoothing out the big market movements, creating a more stable withdrawal amount year-after-year.
What am I missing? Why is this method not being researched more?
A fixed percentage withdrawal is attractive because it's simple. It might be emotionally jarring to realize that one's income drops with a severe market downturn, but there's also the emotional satisfaction of knowing that actually running out of money is unlikely.
Statistics: Posted by hammockhiker — Sun Nov 03, 2024 3:09 am — Replies 2 — Views 152