Harvesting Withdrawals in Retirement (Updated 5/11/08)The traditional method to harvest withdrawals in retirement had been to rebalance to a target equity-fixed split. The idea was to maintain a constant “risk level” which the retiree would be comfortable during both bull and bear market cycles.
However, some researchers have explored the idea of using alternative methods to harvest withdrawals from a retirement portfolio. This article will present those alternative methods. I will also provide Excel spreadsheets so that these methods can be examined using historical data.
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John Spitzer and Sandeep Singh
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Link | Is Rebalancing a Portfolio During Retirement Necessary? (pdf) | Spreadsheet | withdrawSUNY.xls | The withdrawal amount is calculated in the traditional way. In other words, an Initial Withdrawal Rate (IWR) is specified. And then each year, the withdrawal amount is increased based on the prior year’s inflation rate. In this way, constant purchasing power is maintained throughout the 30-year retirement period. Four alternative harvesting withdrawal methods are examined: High First: The withdrawal is taken from the asset class that has the highest return. For example, in the year when stocks returned more than fixed income (bonds and bills), the withdrawal is taken from stocks. Likewise, in the year when fixed income returned more than stocks, the withdrawal is taken from fixed income. Low First: The withdrawal is taken from the asset class that has the lowest return. Bonds First: The withdrawal is taken from fixed income (bonds and bills) first. Stocks First: The withdrawal is taken from stocks first. In all four cases, when one asset is depleted, the withdrawal is then taken from the remaining asset.
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Withdrawals are taken at the beginning of each year. Top chart shows portfolio value at the beginning of each year immediately following that year’s withdrawal. Bottom chart shows the stock allocation at the beginning of each year immediately following that year’s withdrawal. | |
Looking at the chart example above, it appears that the “Bonds First” harvesting method has the most potential to improve portfolio survival. To investigate this possibility, I set the following parameters:
Large Stock Allocation: 50%Then for every 30-year withdrawal period starting with 1926-1955 and ending with 1977-2006, I tallied the harvesting method which left the highest remaining balance. The results are overwhelming. When withdrawals are taken at the beginning of the year, the “Bonds First” harvesting method had the highest remaining balance in every 30-year period but one. In that one 30-year period from 1962-1991, the rebalancing method had the higher remaining balance. And when withdrawals are taken at the end of the year, the “Bonds First” harvesting method had the highest remaining balance in every 30-year period. ( For additional details on the results, see note 1 )
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| Note 1 | I would like to note that the results from my withdrawSUNY.xls spreadsheet may differ from the results obtained by SUNY professors Spitzer and Singh. This is because the SUNY professors used a different data series for bonds. Whereas I used Ibbotson’s Intermediate-Term (5-year) Government Bonds, the SUNY professors used Ibbotson’s Long-Term (20-year) Government Bonds.
Likewise, the famous Trinity Study used a different data series for bonds. The Trinity professors used Ibbotson’s Long-Term (20-year) Corporate Bonds. In both studies (SUNY and Trinity), their results noted some cases where a 4% inflation-adjusted initial withdrawal rate using 50/50 stocks/bonds allocation failed to survive a 30-year period. In contrast, studies that used Intermediate-Term Bonds instead of Long-Term Bonds have shown that a 4% inflation-adjusted initial withdrawal rate using 50/50 stocks/bonds allocation survived every 30-year period from 1926-2007. See note 2 below.
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| Note 2 |
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Rebalance Bands
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Spreadsheet | withdrawRBands.xls | As we saw in the preceding section, the “Bonds First” withdrawal method produced the highest rate of success. However, one obvious drawback with that method is that after the bonds are completely withdrawn, the portfolio becomes 100% stocks. And since a portfolio with all stocks can be more volatile, this result might be uncomfortable for some retirees. One compromise would be to rebalance the portfolio at the point when the all the money in bonds have been withdrawn. Indeed, this method has already been suggested. Perhaps the most popular advocate of this approach is Ray Lucia. Lucia calls his harvesting method “Buckets of Money”. You can a view demo of Lucia’s “Buckets of Money” harvesting method at his website. Click HERE
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Withdrawals are taken at the beginning of each year. Top chart shows portfolio value at the beginning of each year immediately following that year’s withdrawal. Bottom chart shows the stock allocation at the beginning of each year immediately following that year’s withdrawal. |
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Alternative methods to harvest withdrawals in retirement have been discussed in the following books and articles: The Grangaard Strategy: Invest Right During Retirement Yes, You Can Still Retire Comfortably! You Don't Have to Retire from Aggressive Investing |
