OBJECTIVE

“Compendium of sustainable withdrawal rates, part 2” is eligible for CE credits, see Accreditation details for more information

**Course summary: **Financial planner and market theoretician Jim Otar walks advisors through sustainable withdrawal rates (SWR) for many different variables, asset allocation methods and withdrawal strategies. You must successfully complete the course, “**Purpose-Driven Sustainable Withdrawal Rates**,” as well as **“Compendium of Sustainable Withdrawal Rates, Part 1,”** before taking this course.

Continuing from Part 1 of this course, in this part we examine the following strategies:

**Asset Allocation:**growth harvesting and asset dedication**Time Segmentation:**bucket strategies**Withdrawal Strategies:**freeze Cost of Living Adjustment (COLA), limit withdrawals based on portfolio growth or value, pay-cut**Various Equity Benchmarks:**Canada, USA, Britain, Japan, Australia

## Growth Harvesting

This is identical to our base case, with the following exception: when the equity portion of the portfolio grows by more than 8% at the end of the year, we take 50% of that growth and place it into a separate cash bucket for future retirement income. The target asset mix and rebalancing applies only to the remaining portfolio, excluding the cash bucket. Typically, as time goes on, there is more cash and less equities in the combined assets.

Here are the sustainable withdrawal rates:

Table 1: Sustainable Withdrawal Rate for **Essential Expenses:**

Retirement Age: | SWR for ESSENTIAL Expenses |
||
---|---|---|---|

Growth Harvesting | Base Case | ||

60 | 2.76% | 3.03% (55/45) | |

65 | 3.05% | 3.31% (55/45) | |

70 | 3.44% | 3.68% (55/45) | |

75 | 4.04% | 4.29% (55/45) |

Table 2: Sustainable Withdrawal Rate for **Basic Expenses:**

Retirement Age: | SWR for BASIC Expenses |
||
---|---|---|---|

Growth Harvesting | Base Case | ||

60 | 3.48% | 3.67% (60/40) | |

65 | 3.86% | 4.01% (60/40) | |

70 | 4.52% | 4.51% (60/40) | |

75 | 5.49% | 5.31% (60/40) |

Table 3: Sustainable Withdrawal Rate for **Discretionary Expenses:**

Retirement Age: | SWR for DISCRETIONARY Expenses |
||
---|---|---|---|

Growth Harvesting | Base Case | ||

60 | 4.18% | 4.48% (70/30) | |

65 | 4.63% | 5.13% (70/30) | |

70 | 5.39% | 5.93% (65/35) | |

75 | 6.35% | 7.07% (55/45) |

Here is a typical average asset mix over the life of the retiree:

Figure 1: Typical average asset mix for the Growth Harvesting Strategy

Generally, growth harvesting produces a lower SWR than the base case. This is because near the SWR, there is little need for the cash bucket; it just sits there as deadweight. However, at higher withdrawal rates, it has some benefit in reducing the probability of depletion.

**Example:** A retiree has $100,000 at age 65 with 50% equities/50% fixed-income asset mix. He needs $4,500/year indexed to CPI for the rest of his life. Here are the probabilities of depletion:

By Age: | Probability of Depletion | ||
---|---|---|---|

Growth Harvesting | Base Case | ||

85 | 0% | 1% | |

90 | 10% | 14% | |

95 | 25% | 36% |

## Asset Dedication

This is identical to our base case with the following exception: The fixed income portion of the portfolio never holds less than 4 years’ of withdrawals. If the entire portfolio has less than 4 years’ of withdrawals, then there are no equity holdings, only fixed income.

Here is a typical average asset mix over the life of the retiree. The portfolio has a starting asset mix of 50% equities/50% fixed income and the initial withdrawal rate is 4%. Note that at around age 82, the equity percentage starts declining so that the fixed-income portion of the portfolio can hold 4 years of income:

Figure 2: Typical average asset mix for the 4-Year Asset Dedication

Here are the sustainable withdrawal rates:

Table 4: Sustainable Withdrawal Rate for **Essential Expenses:**

Retirement Age: | SWR for ESSENTIAL Expenses |
||
---|---|---|---|

Asset Dedication | Base Case | ||

60 | 3.00% | 3.03% (55/45) | |

65 | 3.26% | 3.31% (55/45) | |

70 | 3.60% | 3.68% (55/45) | |

75 | 4.06% | 4.29% (55/45) |

Table 5: Sustainable Withdrawal Rate for **Basic Expenses:**

Retirement Age: | SWR for BASIC Expenses |
||
---|---|---|---|

Asset Dedication | Base Case | ||

60 | 3.62% | 3.67% (60/40) | |

65 | 3.99% | 4.01% (60/40) | |

70 | 4.41% | 4.51% (60/40) | |

75 | 5.09% | 5.31% (60/40) |

Table 6: Sustainable Withdrawal Rate for **Discretionary Expenses:**

Retirement Age: | SWR for DISCRETIONARY Expenses |
||
---|---|---|---|

Asset Dedication | Base Case | ||

60 | 4.48% | 4.48% (70/30) | |

65 | 5.01% | 5.13% (70/30) | |

70 | 5.81% | 5.93% (65/35) | |

75 | 6.87% | 7.07% (55/45) |

Asset dedication does not improve portfolio longevity because it kicks in at the late stages only—long after the tipping point. Surely, you can allocate more years to the fixed-income portion hoping it will improve the outcome. We will look at this in the next section.

## Standard Bucket Strategies

Assets are divided into a number of buckets at the beginning of retirement. Usually, the first bucket is the most conservative, with cash only. The last bucket is the most aggressive. Withdrawals are taken from the first bucket until it depletes. Once it is depleted, then withdrawals are from the next bucket until that one depletes, and so on. This is also called “time-segmentation of withdrawals.” (For more information on bucket strategies, please see the course “**Kicking the Bucket Strategy**.”)

Here is how we’ve constructed our buckets:

**1 bucket:**

Base Case, 100% of assets

** 2 buckets: **

Bucket #1: Cash, 25% of assets

Bucket #2: Balanced portfolio, 50%/50% asset mix, 75% of assets

**3 buckets: **

** ** Bucket #1: Cash, 25% of assets

Bucket #2: Conservative portfolio, 30%/70% asset mix, 37.5% of assets

Bucket #3: Growth portfolio, 70%/30% asset mix, 37.5% of assets

**4 buckets:**

Bucket #1: Cash, 25% of assets

Bucket #2: Conservative portfolio, 30%/70% asset mix, 25% of assets

Bucket #3: Growth portfolio, 70%/30% asset mix, 25% of assets

Bucket #4: 100% Equity portfolio, 25% of assets

**5 buckets: **

** ** Bucket #1: Cash, 20% of assets

Bucket #2: Bonds, 20% of assets

Bucket #3: Balanced portfolio, 50%/50% asset mix, 20% of assets

Bucket #4: Growth portfolio, 70%/30% asset mix, 20% of assets

Bucket #5: 100% Equity portfolio, 20% of assets

Here are the sustainable withdrawal rates:

Table 7: Sustainable Withdrawal Rate for **Essential Expenses:**

Retirement Age: | SWR for ESSENTIAL Expenses |
|||||
---|---|---|---|---|---|---|

2 Buckets | 3 Buckets | 4 Buckets | 5 Buckets | Base Case | ||

60 | 3.14% | 3.30% | 3.13% | 3.26% | 3.03% (55/45) | |

65 | 3.42% | 3.60% | 3.42% | 3.58% | 3.31% (55/45) | |

70 | 3.83% | 4.02% | 3.97% | 4.06% | 3.68% (55/45) | |

75 | 4.47% | 4.68% | 4.49% | 4.68% | 4.29% (55/45) |

Table 8: Sustainable Withdrawal Rate for **Basic Expenses:**

Retirement Age: | SWR for BASIC Expenses |
|||||
---|---|---|---|---|---|---|

2 Buckets | 3 Buckets | 4 Buckets | 5 Buckets | Base Case | ||

60 | 3.62% | 3.71% | 3.52% | 3.57% | 3.67% (60/40) | |

65 | 4.00% | 4.11% | 3.85% | 3.99% | 4.01% (60/40) | |

70 | 4.50% | 4.59% | 4.31% | 4.46% | 4.51% (60/40) | |

75 | 5.22% | 5.35% | 5.17% | 5.24% | 5.31% (60/40) |

Table 9: Sustainable Withdrawal Rate for **Discretionary Expenses:**

Retirement Age: | SWR for DISCRETIONARY Expenses |
|||||
---|---|---|---|---|---|---|

2 Buckets | 3 Buckets | 4 Buckets | 5 Buckets | Base Case | ||

60 | 4.32% | 4.28% | 4.20% | 4.19% | 4.48% (70/30) | |

65 | 4.77% | 4.71% | 4.64% | 4.62% | 5.13% (70/30) | |

70 | 5.45% | 5.39% | 5.36% | 5.35% | 5.93% (65/35) | |

75 | 6.48% | 6.39% | 6.47% | 6.52% | 7.07% (55/45) |

We observe that for essential expenses, bucket strategy provides a somewhat larger SWR than the base case. For basic expenses, the difference is insignificant. For discretionary expenses, the SWR from the bucket strategy is lower than the base case.