Investing - Theory, News & General • Flexibility in portfolio withdrawals – how much flexibility is enough?

Hi StillGoing

Thank you for doing this analysis.

My interpretation is that modest amounts of flexibility (here, F 0.3) significantly reduced risk of portfolio depletion in bad scenarios without excessive spending cuts and also allowed for increased spending in good scenarios. Is that your take too?

The argument for SWR rather than variable withdrawals (with any strategy) is either complexity or difficulty living on variable withdrawals, but this suggests that the latter effect is small for a retiree already withdrawing at a conservative rate (4-5%). Difficulty executing a strategy is a bit of a different issue; I rather like Ben Matthew’s TPAW website and spreadsheet.

Phoroner

I'd agree - even a small amount of flexibility is useful in terms of portfolio survivability. While I have only covered scenarios where the flexibility factor is fixed, it can also change with circumstances. For example, a very early retiree might adopt a small amount of flexibility before social security kicks in and a greater flexibility afterwards.

Most of the 'hybrid' methods (i.e. those that lie somewhere between SWR and fully percentage of portfolio) are more difficult to implement, but often not excessively so. For example, in the example I've used here you need to calculate both SWR and percentage of portfolio (the same is also true for Carlson's endowment formula and Vanguard's Dynamic Spending Strategy), while with portfolio smoothing you need to calculate the average portfolio size over the last (say) 3 years before then applying a percentage of portfolio. However, IMV, Guyton-Klinger is overly complicated (and the discontinuities in it offend my mathematical sensibilities), but it appears to have a certain level of popularity. I'd agree TPAW has had undergone a lot of thought and effort and is a really practical approach (and the fact that Ben is continually expanding the functionality is great too).

cheers
StillGoing

Statistics: Posted by StillGoing — Thu Apr 18, 2024 3:35 am — Replies 15 — Views 1970

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