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.