Sustainable Withdrawal Rates

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
8Toretirement
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Re: Sustainable Withdrawal Rates

Post by 8Toretirement » 26 Oct 2016 11:39

I believe safe withdrawal should be split by age. Older members of this forum will likely have great safety in using traditional methods of safe withdrawal rates since they have moved past the sequence of withdrawal risk and have enjoyed significant gains over there lifetime. However, members in my age bracket and younger (53) may have to look at safer options, which is where I depart from the traditional retirement portfolio of a blend of stocks and bonds, and favour greater safety and higher savings/investment requirements to offset potentially lower returns from a safe portfolio.

Here is my case. Stocks are more than likely above the middle point of returns or the growth rate in developed countries or GDP growth would be higher. We have come a long way from the bottom of the financial crisis, and personally, I don't see much support for large gains in the stock market, maybe smaller gains.

Second, we are at the end or in the last gasp of decades long bond rally. Interest rates cannot go much lower, so there are no gains to be made in bonds, they are purely safety, but will be subject to equity loss as rates move higher. Not good when you are in the withdrawal phase. Rates cannot continue forever at these low levels as the excess liquidity is unbalancing markets and saddling consumers with ever higher debt. If we agree that businesses need customers to make profit then we can assume diminishing ability of consumers to purchase product as their debt levels increase. Wage increases are stagnant in most jobs.

For investors close to retirement this is the problem, there is likely higher risk to the downside over an extended period, more than just a few years barring a market crash. Central banks have no means to fight recessions with these rates without further inflating markets with quantitative easing (printing money out of thin air). If the new retiree is not significantly invested in secure investments moving forward they will be subject to these forces for perhaps a longer period than in the past. I can't see how these same tricks can be used twice in a market crash, not saying there will be one but they have no means to counter one. We will actually go through a real recession where market forces decide winners and losers, not money from governments.

jay
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Re: Sustainable Withdrawal Rates

Post by jay » 06 Nov 2016 10:28

Not sure if already mentioned, but this method (The Floor-Leverage Rule for Retirement) claims to have a much higher success rate.

Unconventional, but interesting.

In my testing, leveraged ETFs, if de-leveraged to become 1X (holding the rest in cash), and periodically re-balanced, may not be all that bad. Here is a 16 year backtest to ensure that the decay factor isn't there, and this is using a very expensive 2X fund. Using a cheaper one like SSO, the results are much better, but the test only goes back to 2008. Still a decent long enough backtest with tons of market fluctuations.

As another exmaple: if one's asset allocation calls for 50/50 FI/Equity, then one can hold 83.33% in cash and 16.67% in a 3XETF to achieve the desired 50% equity exposure. However, it seems there is more tracking error using 3X ETFs as this test shows, even when rebalancing more frequently (quarterly as opposed to yearly). Hence probably why the authors don't advocate rebalancing the 3X ETF into a decline, but only when there are gains.

Overall, an interesting approach. I have always been intrigued by leveraged ETFs but there is so much hate and warning signs surrounding them, always pointing to how the math doesn't add up, which is only true for a buy/hold approach. If used so that the overall exposure to equity remains at 1X (90% - 110% kinda exposure), my conclusion is that if one can make on their cash (term deposits, GICs, RRBs etc...) a better return than the rate at which the underlying leveraged ETF pays to borrow, they will achieve more alpha and less beta. The approach however seems to work better on 2X ETFs than on 3X ones.

kumquat
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Re: Sustainable Withdrawal Rates

Post by kumquat » 25 Nov 2016 11:17

Curious thing happened. I have a VPB from Sask's Public Employee's Pension Plan. Essentially, it's an RRIF. I started withdrawls at 4% for a variety of reasons, the Trinity Study being one of them. In one of their reports they suggested my money would last to age 100 (I'm 67 now) and that I could safely withdraw 6.5%.

Are they using a different time frame (ie life expectancy vs. 30 years) or higher investment gains, or both? I'm surprised that the number is that high, they are usually fairly conservative.

I plan to withdraw enough so that income splitting fills my wife's lowest tax bracket until age 72 and the minimum thereafter, so it's irrelevant but I'm curious where the number came from.
I don't intend to offend anyone, that part is just a bonus.

8Toretirement
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Re: Sustainable Withdrawal Rates

Post by 8Toretirement » 25 Nov 2016 13:32

kumquat wrote:Curious thing happened. I have a VPB from Sask's Public Employee's Pension Plan. Essentially, it's an RRIF. I started withdrawls at 4% for a variety of reasons, the Trinity Study being one of them. In one of their reports they suggested my money would last to age 100 (I'm 67 now) and that I could safely withdraw 6.5%.

Are they using a different time frame (ie life expectancy vs. 30 years) or higher investment gains, or both? I'm surprised that the number is that high, they are usually fairly conservative.

I plan to withdraw enough so that income splitting fills my wife's lowest tax bracket until age 72 and the minimum thereafter, so it's irrelevant but I'm curious where the number came from.
I would think they are averaging down on your term to mortality with funds available and their expected rate of return. The more conservative the portfolio the more accurate their forecast can be as you age.

You could phone the pension department and get a better idea of the forecast data used to determine the withdrawal rate.

Londoncalling
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Re: Sustainable Withdrawal Rates

Post by Londoncalling » 03 Dec 2016 20:24

Hi kumquat

I am with PEPP is well. I have at least another 20 years till retirement but would be grateful if you could post your findings.

Cheers

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Arby
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Re: Sustainable Withdrawal Rates

Post by Arby » 07 Mar 2017 15:05

A new study from Morningstar regarding safe withdrawal rates for Canadians:
There are three primary findings from our research. First, while the historical performance of stock and bond markets in Canada has been relatively similar to the global average, future expected returns in Canada, especially in the near term, are likely to be considerably lower. Second, given these lower returns, safe withdrawal rates are relatively low, and may decrease further when incorporating longer life spans and the impact of fees. Finally, a balanced portfolio is likely to be the best asset allocation for Canadian retirees.

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cannew
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Re: Sustainable Withdrawal Rates

Post by cannew » 17 Mar 2017 20:20

Flaccidsteele wrote:I don't think inflation will be coming back any time soon.

The Paul Volcker era has been replaced with the complete opposite.
Really? I think it's running close to 3%?

Profit not Prophet
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Re: Sustainable Withdrawal Rates

Post by Profit not Prophet » 17 Mar 2017 22:22

And it's only been fancy footwork and lies that keeps it in that 'low'. Core ya right.

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Re: Sustainable Withdrawal Rates

Post by Flaccidsteele » 19 Mar 2017 00:29

cannew wrote:
17 Mar 2017 20:20
Really? I think it's running close to 3%?
Sort of. Low either way.

Canada's inflation rate in January rises to 2.1%, fuelled by gas prices
Retired @ 40 after reading Munger/Buffett. I avoided a fragile retirement by avoiding conventional volatility management (diversification, re-balancing and asset-allocation). "Put 90% in a very low-cost S&P 500 index fund...the long-term results will be superior" - Warren Buffett

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Re: Sustainable Withdrawal Rates

Post by Peculiar_Investor » 04 Oct 2017 10:59

Another viewpoint, Two smarter ways to determine how much you can safely withdraw funds in retirement - The Globe and Mail
Ian McGugan wrote:If you want to see a group of financial experts brawl, ask them how much it's safe to withdraw from your investment portfolio each year in retirement.

One of the most common answers is to suggest some variation of the 4 per cent rule. Under this guideline, a retiree would take out 4 per cent of his or her original portfolio in the first year and continue to withdraw the same amount – but adjusted for inflation – each subsequent year.

The 4 per cent rule offers the undeniable attraction of simplicity. But the more you examine it, the more unsatisfactory it becomes.

One flaw – a rather major one – is that it doesn't work for everyone everywhere. The rule was based on a landmark 1994 study by William Bengen, a U.S. financial planner, who looked back at several decades of U.S. market history to gauge a safe withdrawal rate for a retiree with a conventional balanced portfolio. Mr. Bengen wanted to establish a spending rule that would have allowed a retiree to survive even a Great Depression or a world war without running out of money.

The rule has since become embedded in the public mind as the correct withdrawal rate for every situation. But it's not.
The article goes on to discuss some of the "flaws" and updated studies. For Canadians, this 2016 study by Wade Pfau, Does The 4% Rule Work Around The World? | RR, is probably worthy of a review.

Clearly there is no single, correct answer and many alternatives. Understanding the basic model and assumptions goes a long way to understanding how applicable the different approaches can be used for your situation.
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