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

2. 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?

3. 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

4. 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

5. 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How much should be withdrawn in subsequent years?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?

6. 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.

7. 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

8. 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

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

10. 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.