The Financial Survival Guide to Retirement Week 2 Retirement Strategies - Advanced

Review What methods can be used to simulate retirement futures? What is good and bad about each? Do simulations give a probability of success? What is the 4% Rule? What is good and bad about this rule?

Retirement Strategies Last week we looked at the 4% Rule But… People don’t leave their retirement on autopilot If things go badly, people cut back If things go well, can maybe afford to withdraw more Decision rules The rules one will use to guide withdrawals

Decision Rules Decision rules allow for a possible higher level of living in retirement Higher initial income level over not using rules Comparable final income level to not using rules Greater total withdrawals over retirement BUT – person must be willing and able to cut back, if needed

Retirement Strategies How does one withdraw money from their retirement portfolio? Need to know How much to withdraw the first year? How much should be withdrawn in subsequent years? What should be done if things go badly? Should anything be done if things go well? Should the investment strategy change over time?

Terminology Success rate – percentage of simulations that end with a positive portfolio Confidence level – results for which the simulations exceed a specified value. For example, for a legacy at a 95% confidence level of $100,000 means that 95% of the simulations resulted in a legacy of $100,000. Constant dollars – the dollar amount is expressed in terms of today’s dollars. Future dollar amounts are reduced by inflation. Median – half the simulation results were greater and half the results were less than the median value. PV (present value) – future dollar amounts discounted by inflation to today’s values. Standard deviation – a statistical measure of how much things fluctuate. The greater the number, the greater the range.

Analysis Many retirement calculators Vanguard T Rowe Price Fidelity Online calculators do not allow for testing strategies Limited withdrawal strategies No decision rules No failure analysis No market return analysis Retirement Quant Software written by me, originally for me Used for my retirement financial research

Assumptions – for now We’ll start with the basic $1M retirement portfolio $1M in retirement assets Invested 60% in stocks, 40% in bonds Assume person is 65, will live to 99 Rates of return Russell 3000 index for total market Federal Reserve Board data for 10-year Treasuries Withdrawal strategy is 4% Rule

Retirement Quant Enter data Financial projections What-ifs What is the success rate? What is the effect of different retirement income levels?

Let’s See What Happens Using Retirement Quant Start with basic $1M portfolio We’ll test various retirement strategies Start with 80% of pre-retirement income, grow with inflation. 4% rule. Withdraw 4% annually. If portfolio has a loss, only withdraw 95% of previous year’s level. Withdraw 4% annually but have min and max income levels. Start with higher income and decrease over time. Use decision rules. Reset withdrawal rate every five years to a safe level Until age 85, draw down 1/nth of 85% of your portfolio. Purchase annuity at age 85. Use 50% of your assets to purchase an annuity. Use 4% rule for other 50 %. Change asset allocation over time. Invent your own and test it.