Sustainable Withdrawal Rates

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
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NormR
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Re: Sustainable Withdrawal Rates

Post by NormR »

ghariton wrote:Which is the right decision?
Well, I was going to pick one. But then, everything else was the same, which is a good trick since the payout ratios differ which will eventually lead to different balance sheets, etc. So, something has to be different. Thus, much like the cake, the question is a lie. :wink:
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Re: Sustainable Withdrawal Rates

Post by ghariton »

cannew wrote:Would I sell A to buy B, NO. A has proven it's worth and I would never sell it.
Thank you for the responses. They have helped me better understand your approach.

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Re: Sustainable Withdrawal Rates

Post by ghariton »

NormR wrote:Well, I was going to pick one. But then, everything else was the same, which is a good trick since the payout ratios differ which will eventually lead to different balance sheets, etc. So, something has to be different. Thus, much like the cake, the question is a lie. :wink:
Well, I understand that you are a stock picker, at least to some degree. If so, you must believe that one company is a better choice than another based on something other than financial statements, etc, which are as public as can be and so enter into everyone's decision making, directly or indirectly. Presumably you are relying on investor irrationality or some market anomalies. In the presence of these, you could indeed have different valuations even though the fundamentals are the same.

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Re: Sustainable Withdrawal Rates

Post by couponstrip »

SQRT wrote:I have read studies that suggest an income approach to withdrawals is suboptimal. These studies are probably correct but I feel better just spending my divs. This way I don't have to decide when and which stocks to liquidate.
That's the most candid and perhaps the best rationale I have ever seen for a dividend/dividend growth strategy. For similiar reasons, people live frugal lives and die with millions in the bank. The money was never going to be spent. It's very presence brings those individuals pleasure, peace, and comfort. And that's worth something.
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Re: Sustainable Withdrawal Rates

Post by SQRT »

couponstrip wrote:
SQRT wrote:I have read studies that suggest an income approach to withdrawals is suboptimal. These studies are probably correct but I feel better just spending my divs. This way I don't have to decide when and which stocks to liquidate.
That's the most candid and perhaps the best rationale I have ever seen for a dividend/dividend growth strategy. For similiar reasons, people live frugal lives and die with millions in the bank. The money was never going to be spent. It's very presence brings those individuals pleasure, peace, and comfort. And that's worth something.
Thanks but at some point I intend to start liqiuidating above the divs. I hope I am not too old at that point to enjoy it. I have never been accused of being a LBYM kind of a guy but as you settle into retirement the urge to splurge seems to decline, I think.
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Re: Sustainable Withdrawal Rates

Post by CROCKD »

How best to manage a RRIF

Why is it that everytime I read one of these articles, the author seems to assume that though you are required to withdraw 7%+ at age 72+ that you spend the withdrawal amount less tax.

It may be that you can comfortably live on much less and can invest the excess.
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Re: Sustainable Withdrawal Rates

Post by DanH »

A couple of short articles that may be of interest from yours truly.

Withdrawal rate debate (A summary of two recent papers on withdrawal strategies)

A safe withdrawal rate? (My take on using the 4% rule going forward - i.e. it's a bad idea)

And Morningstar has been tackling this issue of late...

Do retirees have it backward? (Critique of one of the papers I summarized in the first article above)

Your asset allocation during retirement (A follow up to the piece immediately above)
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Re: Sustainable Withdrawal Rates

Post by brucecohen »

CROCKD wrote:How best to manage a RRIF

Why is it that everytime I read one of these articles, the author seems to assume that though you are required to withdraw 7%+ at age 72+ that you spend the withdrawal amount less tax.

It may be that you can comfortably live on much less and can invest the excess.
I was surprised last week when a retired CA told me he needed 8% a year "to avoid capital erosion." He was surprised when I pointed out that he likely needs less because he's reinvesting part of his after-tax RRIF withdrawal so that capital is not eroding. He also admitted that he had not considered that a RRIF is deliberately designed to be a depleting asset.
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Re: Sustainable Withdrawal Rates

Post by Springbok »

DanH wrote:A couple of short articles that may be of interest from yours truly.
I don't get these studies and predictions. They seem to ignore many criteria.

As I understood them, the original studies were based on long term performance of markets. Articles appear to be looking at a snapshot of current markets. Why?

It is true that keeping withdrawal down initially may be a prudent thing to do. But so would avoiding the 2% plus fees mentioned in the articles. Actual inflation for retiree, may also be lower than numbers predicted by bond markets. Deduct 3%. Taxes would be paid out of the 4%. Different for different retirees so rule never was 4% after tax.

We have drawn 4% of original amount plus inflation for past 10 years and during that period portfolio has also grown by 4% pa. This despite very uncertain times. One article seemed to imply that income had been affected by the recession. I don't recall that happening. I didn't see any need to reduce our withdrawal during recession and certainly not now!
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Re: Sustainable Withdrawal Rates

Post by DanH »

Springbok wrote:
DanH wrote:A couple of short articles that may be of interest from yours truly.
I don't get these studies and predictions. They seem to ignore many criteria.
It's done in a general context but what criteria do you think are ignored?
Springbok wrote:As I understood them, the original studies were based on long term performance of markets. Articles appear to be looking at a snapshot of current markets. Why?
Because you are effectively "buying in" or measuring return potential from today's prices. The starting valuation level has a very strong influence over the go-forward return potential. Are you suggesting that valuations be ignored and to just take 4% and forget about what the future may hold? Why not 5% or 6%?
Springbok wrote:It is true that keeping withdrawal down initially may be a prudent thing to do. But so would avoiding the 2% plus fees mentioned in the articles. Actual inflation for retiree, may also be lower than numbers predicted by bond markets. Deduct 3%. Taxes would be paid out of the 4%. Different for different retirees so rule never was 4% after tax
If I'm reading your comments correctly you are initially questioning why I'm factoring in current valuations but then suggest that it's prudent to keep withdrawals down initially. If you needn't worry about current valuations - ie, future returns - then why hold back on initial withdrawals?
Springbok wrote:We have drawn 4% of original amount plus inflation for past 10 years and during that period portfolio has also grown by 4% pa. This despite very uncertain times. One article seemed to imply that income had been affected by the recession. I don't recall that happening. I didn't see any need to reduce our withdrawal during recession and certainly not now!
Congratulations - you are in the minority. The figures you cite imply something like a 10% annualized return over he past decade. Do you think you can replicate that in the next decade? If you can't, would you expect to cut withdrawals? Or just keep on trucking?
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Re: Sustainable Withdrawal Rates

Post by Springbok »

DanH wrote: It's done in a general context but what criteria do you think are ignored?
- Not everyone is just beginning withdrawal. Many of us retirees are already fully invested in higher yielding securities.

- For fixed income, there are alternatives to GOC bonds! For example, investment grade corporate bonds, convertible debentures, preferred shares. Fixed Income yield can be in the 4-5.5% range.

- I don't believe the SWR studies required retirees to maintain a certain level of risk. It is possible even today, to earn more than the 4% withdrawal if portfolio risk is adjusted within reason.

- The 4% SWR was not intended to maintain portfolio value. It was in some cases based on dieing broke. If savings were put under mattress, they might provide sufficient additional income for a retiree if withdrawn at 4% pa. Age and expected longevity are factors to be considered.

- You mentioned taxes. Nothing changed there and they always had to come out of the 4%.

- Fees are not a consideration for many of us, but you used 2%. I doubt mine are 0.1%. No adviser fees, almost no mutual fund or ETF MERs, just small discount trading costs.

- Bond yields may be predicting 2% inflation. But what is important is the real inflation the retiree sees for living expenses. As retirees age, their living costs may actually drop so no need to increase the withdrawal rate by CPI. Besides, we get CPP/OAS which cover basic living costs and those pensions are indexed.
Congratulations - you are in the minority.
I doubt we are in a minority. Even some balanced funds generated 8 or 9% after fees over same period.

None of us can predict the future, but world economies are still in doldrums. Real interest rates are at extreme lows. Why would we not expect things to improve from these lows instead of assuming the worst for the foreseeable future?
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Re: Sustainable Withdrawal Rates

Post by AltaRed »

I do not believe any balanced fund will return 8-9% net of fees over a sustained period of time, at least not without ROC being a component of the claimed return.
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Re: Sustainable Withdrawal Rates

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AltaRed wrote:I do not believe any balanced fund will return 8-9% net of fees over a sustained period of time, at least not without ROC being a component of the claimed return.
I was talking about over the same period as our portfolio had that return. If you don't believe it, go and have alook at some of the balanced funds. We had this discussion in the past about TD Monthly Income Fund which I use to soak up income in our registered accounts. It is good and had a 10 yr yield of about 8% back then. It is now 7.5% for 10yr and 8.1% for 15 yrs.. There are likely balanced funds that are even better. A quick look on BMOIL showed 49 5-star Canadian funds that exceeded 9% yield average over past 10 yrs and 50 exceeding 11.1% over past 5 years.

By the way, in reading Bogleheads, I saw they have a similar thread running. It is worth reading. I thought this an apt comment:
HomerJ wrote:... Some people have taken this to an extreme... and claim if you retire TODAY, you better only take 2.8%... which is basically saying that they expect all investments to do worse than inflation for THIRTY years..
Last edited by Springbok on 15 Dec 2013 15:23, edited 1 time in total.
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Re: Sustainable Withdrawal Rates

Post by AltaRed »

I beg to differ. Strip ROC from the data and those long term numbers come down. Balanced funds also had the benefit of perhaps the longest bond bull market in recent history. That is over. That said, I support the use of low cost balanced funds in the average Investor's portfolio and recommend that whenever possible. But I also suggest not to assume more than a long term average of 5% return.
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Re: Sustainable Withdrawal Rates

Post by Springbok »

AltaRed wrote:I beg to differ. Strip ROC from the data and those long term numbers come down. Balanced funds also had the benefit of perhaps the longest bond bull market in recent history. That is over. That said, I support the use of low cost balanced funds in the average Investor's portfolio and recommend that whenever possible. But I also suggest not to assume more than a long term average of 5% return.
TD Monthly Income which I own had zero ROC for the two years I looked at 2011/2012.
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Re: Sustainable Withdrawal Rates

Post by ig17 »

TD Monthly Income is 60% equity, 36% bonds, 4% cash.

Let's be generous and assume:

6% real return for equities
1% real return for bonds
0% real return for cash

Total expected return: 3.96% real
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Re: Sustainable Withdrawal Rates

Post by Springbok »

ig17 wrote:TD Monthly Income is 60% equity, 36% bonds, 4% cash.

Let's be generous and assume:

6% real return for equities
1% real return for bonds
0% real return for cash

Total expected return: 3.96% real
Not sure what your point is.

You could look up the current distribution for the fund. It is about 4%.

Maybe this will help. Dividend return of TSX composite is about 3%. Average Total Return over past 10 years is 8.1%
Last edited by Springbok on 15 Dec 2013 15:24, edited 2 times in total.
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Re: Sustainable Withdrawal Rates

Post by ig17 »

Springbok wrote:Not sure what your point is.
You can't expect 8-9% going forward.
Springbok wrote:Maybe this will help. Dividend return of TSX composite is about 3%. Total average return over past 10 years is 8.1%
Subtract 2% for inflation, you get 6.1% real. I used 6% real in my estimate.

Focus on the fixed income side. 40% of TD Monthly Income is in bonds. Do you expect the past bond returns to repeat? We are at the tail end of a long bull market in fixed income.
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Re: Sustainable Withdrawal Rates

Post by StuBee »

There is no point in discussing what has already happened (i.e. the very acceptable short, medium and long term returns on TD monthly income fund with apparently little or no ROC). What counts is precisely what cannot be known: future returns. For the past three years, I had been anticipating nominal returns on equity in the 6% range. That must explain why that in each of the three years I have experienced returns of 8.5%, 8% and 10% respectively :roll: (on a 65:35 Eq to FI portfolio).

What I mean is that we can hum and haw and theorize and still have no idea as to what the future may hold. By definition, the future is a black swan event since it has never been seen before.
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Re: Sustainable Withdrawal Rates

Post by Springbok »

ig17 wrote: Do you expect the past bond returns to repeat? We are at the tail end of a long bull market in fixed income.
It seems both you and Alta are looking at returns going forward, which we can only guess at. (Thanks Stubee - you are right!)

I quoted 10 year Balanced Fund Total returns as compared with my own 10 yr Total Returns. This was in response to DanH's comment that I was in a minority with the results I achieved (which obviously I am not)

It would be better to start a new thread if you want to predict or guess at what might happen in future.
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Re: Sustainable Withdrawal Rates

Post by ig17 »

Springbok wrote:It seems both you and Alta are looking at returns going forward, which we can only guess at.
This thread is about sustainable withdrawal rates for a long retirement. How can you figure out what is sustainable and what is not without making assumptions about future returns?
Springbok wrote:I quoted 10 year Balanced Fund Total returns as compared with my own 10 yr Total Returns. This was in response to DanH's comment that I was in a minority with the results I achieved (which obviously I am not)
Do you expect to achieve the same good results in the future? If you do, that too is a guess.
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Re: Sustainable Withdrawal Rates

Post by Springbok »

ig17 wrote: This thread is about sustainable withdrawal rates for a long retirement. How can you figure out what is sustainable and what is not without making assumptions about future returns?
We were talking about the 4% rule, which is supposed to work regardless of short term market predictions.
Do you expect to achieve the same good results in the future? If you do, that too is a guess.
I am not able to foretell the future.
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Re: Sustainable Withdrawal Rates

Post by Dejavu »

Has anyone stopped to define "Sustainable Withdrawal"?
For some it might be
A/"die broke",
B/others want to leave complete fortunes behind,
C/some will run out of money way to early.
D/ something else.
Death wil occur at some unknown time in the future, for most of us I would guess at in the next 40 years or so, for me more like 15 years. We can,t possibly know future market returns, or, what we might do with our portfolios in the mean time. So what I think I need to do is to make the withdrawal rate flexible, because all the other relative ingredients are dynamic. To believe that you have discovered the magic withdrawal rate is to set your self up for trouble ahead.
Perhaps a range of possibilities is more appropiate, e.g. say 2-5%.
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Re: Sustainable Withdrawal Rates

Post by DanH »

Springbok wrote: - Not everyone is just beginning withdrawal. Many of us retirees are already fully invested in higher yielding securities.
Okay but consider that evaluating an existing withdrawal strategy already in motion and evaluating a new one about to start are basically the same. The difference you see is psychological. As for the higher yielding securities, with rising prices those yields have come down. The only way those securities are MUCH higher yielding is if you're calculating based on your cost (which is illusionary in a forward-looking analysis) or if you happen to be invested in very high yield securities which involve significantly more risk than the market or the group of "high yield equities" in general.
Springbok wrote: - For fixed income, there are alternatives to GOC bonds! For example, investment grade corporate bonds, convertible debentures, preferred shares. Fixed Income yield can be in the 4-5.5% range.
Yes, I'm aware and never assume GOC bonds and nothing else. For instance, the blend of government, corporate and high yield bonds we use for clients sports a weighted 3% yield - and that's with a pretty short duration compared to the broad market. Broad Canadian market yields just south of 2.7% with a duration approaching 7 years. Yes, some fixed income CAN yield in the 5% range but is that honestly representative of your entire fixed income component? If you had all of your bonds in XHY, for instance, your yield to maturity would be 5.2% per annum.

Even if you had all of your bonds in HY issues, you'd have no real bear market protection unless you had protective puts (which are costly) or lots of cash set aside. So yes you can have higher yields but at the expense of the kind of safety most regular investors are not prepared to give up.
Springbok wrote: - I don't believe the SWR studies required retirees to maintain a certain level of risk. It is possible even today, to earn more than the 4% withdrawal if portfolio risk is adjusted within reason.
Some studies assume this and some don't. There is not only one way to study this issue. It's certainly been possible - even likely - to have earned 4% recently but again going forward about 4% is what many can expect from balanced portfolios net of fees.
Springbok wrote: - The 4% SWR was not intended to maintain portfolio value. It was in some cases based on dieing broke. If savings were put under mattress, they might provide sufficient additional income for a retiree if withdrawn at 4% pa. Age and expected longevity are factors to be considered.
Agreed and I'm not suggesting otherwise. But investors need a cushion to ride out financial market volatility and the impact that has on a portfolio in drawdown mode. If you assume a 4% cashable GIC - in theory, just go with me on this - a 4% withdrawal rate is likely to be sustainable even if indexed so long as inflation stays well below 5% per year. But when returns occur in volatile fashion, you need a higher time weighted return to allow those withdrawals to continue uninterrupted so that the client's effective (dollar-weighted) return is sufficient to cover withdrawals, indexing and capital erosion.
Springbok wrote:- You mentioned taxes. Nothing changed there and they always had to come out of the 4%.
I basically agree with you on this. But I mentioned it in case the 4% that advisors are using did not cover taxes. You assume taxes are paid out of there but when you're dealing with the investing public, they often express their goals in terms of spendable cash required. In this case, the advisor must figure out what 'gross' withdrawal from the client's various accounts will net them what they need. We can't assume it's always covered given that everybody's tax situation is different.
Springbok wrote:- Fees are not a consideration for many of us, but you used 2%. I doubt mine are 0.1%. No adviser fees, almost no mutual fund or ETF MERs, just small discount trading costs.
Again, you are in the minority if all you have is 0.1% for all of trading commissions, product fees (you say you have none), no advisory fees (you are DIY) nor any GST/HST on any of those items. The article I wrote was aimed at advisors who are dealing with the public at large and most of them don't share your circumstances.
Springbok wrote:- Bond yields may be predicting 2% inflation. But what is important is the real inflation the retiree sees for living expenses. As retirees age, their living costs may actually drop so no need to increase the withdrawal rate by CPI. Besides, we get CPP/OAS which cover basic living costs and those pensions are indexed.
I don't know your age or where you live but many would estimate that real inflation is much higher than CPI reports. I also know that there are many factors that work the other way. Big items like food, housing and energy have seemingly seen cost inflation that far exceeds CPI. This is perhaps another discussion entirely but my point - again considering the broad cross section of people using their savings for cash flow - was to point to an inflation expectation that was not pulled out of thin air.

Any investor must change their investment-generated cash flow based on their needs. But long-term planning would require at least some estimate of long-term care - i.e. what form that might take, what it will cost (less travel but more care and cost inflation is high). These are not issues to be casually waved away. But maybe your circumstances are different from most.
Springbok wrote: I doubt we are in a minority. Even some balanced funds generated 8 or 9% after fees over same period.
Again sure "some" balanced funds have. And if they have, they're in the minority alongside your household. A balanced portfolio of 60% stocks (evenly split between Canada and global) and 40% Canadian broad market bonds (Fed + Prov + Corp) returned less than 6% annually for the decade ending October 31, 2013. And that's before the impact of trading costs and any other investment related fees.

Taking a broader view of this about 0.6% of all balanced funds that have existed for 10+ years returned a net 8% or more over the past decade. Many of those funds are lower-fee versions so the average fee of those funds is well below 2% so even grossing up the numbers to make them before fees would likely keep the percentage in the 5% - 7% range.

That meets my definition of "minority".
Springbok wrote:None of us can predict the future, but world economies are still in doldrums. Real interest rates are at extreme lows. Why would we not expect things to improve from these lows instead of assuming the worst for the foreseeable future?
What you call "assuming the worst" I call being realistic. Many thought I was assuming the worst a dozen years ago (almost to the day!) when I publicly predicted that some of these high-payout balanced would have to cut distributions or risk significant capital erosion. Those people who thought I was "assuming the worst" were, as it turns out, blindly assuming that the past would repeat in perpetuity or that their chosen product was immune from economic reality. (See blog posts on BMO Monthly Income.)

Now withdrawing 4% of a balanced portfolio is less extreme than some of those high-payout funds. But I'm using the same logic I applied to my analysis of those balanced funds - and it can be applied to any asset mix with any fee levels. But it is forward-looking and it is an attempt to make some broad predictions. As imprecise as this is, it's a whole lot better than copying and pasting the past decade.
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Re: Sustainable Withdrawal Rates

Post by BRIAN5000 »

I used 6% real in my estimate
I get confused when people use a number like this.

Someone humour me please approximate numbers only, with 2% Inflation, 2% Tax, lets make it about 65/35 split, (or 2/3-1/3) 3% on fixed income (per Dan) what return on the equity portfolio do I need to make 6% real return? (after tax, after Inflation)
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