There’s a lot of flap currently about withdrawal rates — should they be reduced from the historical 4 percent rate (which really was 4 percent plus inflation, although everyone seems to have abbreviated Bill Bengen’s original thesis)?
Morningstar (among others) has questioned the 4 percent rate, given volatility and downturns. I’ve even heard 2.8 percent bandied about as the new normal. Morningstar has a thoughtful and good video report online (I like the way Morningstar handles these presentations — providing both the video and a reading transcript) with Christine Benz interviewing Michael Kitces, a financial planner based in Great Falls, Va. Mr. Kitces discusses the variability of returns and suggests guardrails to adjust them, and his presentation was well done and interesting.
See also: The 4 percent myth
As you might expect, given all the noise, I got to wondering what would happen if I took, say, five mutual funds and ran a simulation through Morningstar Advisor Workstation from Jan. 31, 2000 to March 31, 2013. My feeling was that this was a very interesting 12.25-year period, with the aftereffects of bubblicious behavior (March 2000 to March 2003), a credit crisis (2008 and 2009, with remnants hanging on) and the new volatility overlay fogging the mirror for the whole messy time. I decided to use five Franklin Templeton funds, although I would bet I could have equally good results with American Funds or Fidelity, assuming a thoughtful selection; in other words, the dartboard technique could be disastrous.
I use one of the funds I chose for this exercise frequently, one sometimes and the other three not at all. This is not a typical Richard Hoe portfolio. I picked three of the choices out of the air, however there was some thought — I wanted some small company stuff, since small companies are great stock-market performance engines, and some research too. Here are the parameters:
(1) $1 million deposited Jan. 1, 2000;
(2) Start withdrawing at a 4.2 percent annual rate monthly;
(3) Increase the withdrawal rate by 3 percent at the end of each year for inflation; and
(4) Use C shares, with the thought that, while a broker-dealer wouldn’t permit C shares for a $1 million fund-family deposit, that C loads would be higher; in other words, I wanted C-share sales loads.
The first year total withdrawal over 12 months was $42,382, and the 12th year withdrawal was $79,072, with a higher number slated for the 13th year (due to the 3 percent inflation rate). Total withdrawals over 12.25 years equaled $834,506. The value at the end was $1,391,049, and that net amount was after all withdrawals, including the first three months of 2013, which added $21,410 to the withdrawals total.
The funds I used were Franklin Income (30 percent); Templeton Global Bond (30 percent), Mutual Shares (15 percent); Templeton Global Smaller Company (10 percent); and Mutual Quest (15 percent). There would probably be no need for variable annuities and living benefits if (1) planners could control investor financial behavior and (2) planners would thoughtfully select portfolios, or hire the work done.
Have a wonderful spring-like week (green is popping all over the place in Oklahoma, and the red maple tree in our back yard looks sensational) and be thoughtful.
For more from Richard Hoe, see: