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Since many folks here like me are retired, I thought you might be interested in a set of mechanical rules for withdrawing from your portfolio to fund your living expenses each year. If your portfolio has 3 buckets - say 60% in an S&P 500 index fund, 25% in bonds, and 15% in CDs or money market funds - then these rules tell you which bucket to withdraw from each year, and what percentage to withdraw. The percentage can vary each year. Simulations were done to ensure you never run out of money over a 40-year retirement period. The strategy also increases your safe withdrawal rate.

The rules are based on the Guardrail Strategy developed by financial planner Jonathan Guyton and computer scientist William Klinger.

"The guardrails attempt to deliver sufficient—but not overly high—raises in upward-trending markets while adjusting downward after market losses. In upward-trending markets, in which the portfolio performs well and the new withdrawal percentage (adjusted for inflation) falls below 20% of its initial level, the withdrawal increases by the inflation adjustment plus another 10%.

According to this article at Morning Star "The benefit of adhering to those rules is the highest starting safe withdrawal amount of any system we tested. For a 50% equity/50% bond portfolio, the average safe starting withdrawal rate for a 30-year horizon with a 90% probability of success was 5.3%."

https://www.morningstar.com/retirement/want-boost-...

To get an overview of the strategy, watch this video by CFP James Conole:

https://www.youtube.com/watch?v=vkFJUMBSIFE

The 5 rules he describes are:

Portfolio management rule

Treat the cash portion like an emergency fund. Each year, withdraw from stocks portion first, if stocks have outperformed. Withdraw from bonds portion if bonds have outperformed stocks. Withdraw from cash portion only if both stock and bond returns were negative the previous year.

Inflation rule

Adjust the withdrawal amount each year based on the inflation rate. But cap the increase at 6%. That's very important. If inflation was 3%, you can withdraw your annual amount plus 3%. But if inflation was 8%, withdraw the annual amount plus 6%.

Withdrawal rule

Don't give yourself a pay raise for inflation if your stock/bond portfolio declined last year, and your withdrawal rate would be greater than your initial starting rate. Note, if you're getting Social Security payments, these will be adjusted upward with a COLA increase.

Capital Preservation rule

If your portfolio has declined, your withdrawal percentage would normally increase, but you need to set a threshold for that rate.

Prosperity rule

If your stock/bond portfolio has grown such that your withdrawal rate is significantly lower than than the initial rate, give yourself a raise.

Yes, there's more complexity in following these rules than just using a fixed 4% withdrawal rule, but the complexity may be worth it.

The 5 rules he describes are:
Portfolio management rule

This rule is garbage. When I started with G-K in 2006, I first wrote down the exact steps to do G-K and plot out the money flows. Specifically I needed to put the rules into a spreadsheet. I was unable to come up with the steps that would do this one. I asked the question on a couple of money/retirement boards.

A number of people responded, saying some version of "Simple. You do this and this and ..... uuuuh ... hmmm .... gee I have no idea how you would do this."

So I decided that Mssrs. Guyton and Klinger just put that rule in for looks. Because nearly "everybody" thinks you need to have a cash bucket.

The other 4 rules are easy to put in a spreadsheet.

Since 2006, in my portfolio the WR rule has fired 5 times, the CPR 2 times, and the PR once.

This [portfolio management] rule is garbage. I was unable to come up with the steps that would do this one.

So you think the rule is garbage just because you were not able to come up with the steps? Happy to help. Someone has already built the spreadsheet, so you don't need to built it yourself.

Go to https://cfiresim.com/ and select Guyton-Klinger in the Spending Plan dropdown.

The PM rule is simple to understand. Extract the gains from the asset class that has performed best in the previous year to provide the income, and move excess portfolio gains (beyond what is needed for the withdrawal) into a cash account to fund future withdrawals. That cash account is there to withdraw from in case, in a future year, neither the stock portion nor the bond portion delivers a positive return.

So I decided that Mssrs. Guyton and Klinger just put that rule in for looks. Because nearly "everybody" thinks you need to have a cash bucket.

The cash bucket is there for the reason I mentioned above, and it's also there to avoid sequence of returns risk. What if both stocks and bonds decline in the first couple of years of your retirement? To understand how sequence of returns risk can impact your portfolio, see

https://www.youtube.com/watch?v=3gvvuNG8f6c

So you think the rule is garbage just because you were not able to come up with the steps?

Yeah, me and a dozen or so other people in the early-retirement.org FIRE and Money forum.
Maybe cfiresim came up with something that works, but we could not figure it out as Mssrs. Guyton and Klinger described in their paper.

Also, that cfiresim thing is a black box. It's a simulation--using historical data, not a spreadsheet that tells you what to do and when. We don't see the computation steps, so we cannot validate that it is accurate to the G-K paper.

The G-K Spending Plan does not pass the "explain to your wife" test. If it is so hard to understand that none of us dozen-plus people could figure out how to implement it, then it is not usable. Maybe it could pass the Richard Feynman test, but it doesn't pass the mother-in-law test.

IIRC, the G-K spending plan said something like to withdraw any excess return over the scheduled return and plunk that in the cash bucket, and withdrawals come out of that bucket first. I don't recall the details now, nor consider it worthwhile to revisit the paper. That complexity with the cash bucket, is I believe, their nod to people who really really really want the illusory comfort of a bunch of cash.




What if both stocks and bonds decline in the first couple of years of your retirement?

What if?
I retired in September 2006, just in time to walk into the 2008/2009 bear market.

Every day is the start of a possible sequence of returns risk. Every day is the first day of the rest of your portfolio.

SORR risk is only a risk if you retire on a shoestring, with barely enough money.

SORR risk is only a risk if you retire on a shoestring, with barely enough money.

A fact too often emphasized. It can seem hard-hearted to tell someone "there is no arithmetical solution to your problem, you just don't have enough savings". But it's better to know the truth.

Broadly speaking, there are three populations of retirees.

(1) Those that don't have enough money to support themselves till death. No amount of fiddling with formulas will help that situation, they must rely on whatever pensions are offered them by governments or perhaps an ex-employers or kind hearted relatives.

(2) Those that have considerably more than enough to support themselves. Again, fiddling doesn't matter much, they can just buy SPY and live comfortably from the dividends, as Mr Buffett has suggested for his widow.

(3) Only in the middle ground does doing the optimal thing even become worth talking about because longevity risk rears its ugly head: trying to steer a narrow path (which may or may not exist and generally can't be seen in advance) between outliving your savings pot versus never getting any benefit from the bulk of your savings. 90% of that optimization argument goes away for those who stand back, look at the numbers, and realize that only pooled schemes make sense for the best solution to longevity risk. Axiomatically only a small fraction of people will live to unusually ripe old ages, so a pooled pot for those people can be funded cheaply with plenty of assets for the few that end up needing it. It's almost perverse to expect each and every person to squirrel away a huge fraction of their hard-earned assets against an eventuality that definitely won't happen for most of them.

Consequently I generally suggest to people in that middle tier a two pronged approach: buy longevity insurance (usually meaning a horribly overpriced annuity) to cut off the "longevity risk" past a certain age, say a pinch past your statistical life expectancy. That usually takes a minority of your funds, maybe 10-20% depending. Then spend the rest of your savings in a more or less straight line until that age, which is a hugely simpler problem. The solutions to that spending problem that could be explained to any spouse or mother-in-law. The goal is to divide the pot in the ratio that gives you around the same real income both before and after the switch to using the annuity.

Alas there aren't many good longevity risk products. I believe the best is a "mutual inheritance fund", cousin of the tontine. A person retiring at 60-65 might reasonably expect to cut off ALL their longevity risk with a one time contribution equal to 1-2 years of target future real income. Alas, MIFs aren't available. The closest to that available in the US seems to be the TIAA "traditional annuity", which varies its payout upwards beyond a modest guaranteed baseline based on the investment returns and mortality stats of its members. The only other broadly available choice is an annuity from an insurance company. It's generally best to buy that at the last minute, not in advance as a very-deferred annuity, for a variety of reasons.

Jim

Im at 1.98pct withdrawal rate. Will probably retire in the next 5 years, so will likely be lower by then. I have RSP and DGRO which is about 40pct of my portfolio, so will just take the dividends from that. 55pct BRK, would just sell 2pct of that a year. some minor holdings in HSY, GOOG, MKL and some others

My only concern is i am early 40s

I'm at 1.98pct withdrawal rate. Will probably retire in the next 5 years, so will likely be lower by then. I have RSP and DGRO which is about 40pct of my portfolio, so will just take the dividends from that. 55pct BRK, would just sell 2pct of that a year.
...
My only concern is i am early 40s

Not sure if you have read any of these, or if they are of any interest.

The concept:
"The underlying idea is that, ultimately, the amount you can withdraw from a portfolio without ANY danger of it running out is the rate of increase in the value of the portfolio. If you don't withdraw more than the real increase in value, perhaps with some smoothing, then the portfolio will last forever...or at least as long as the businesses in it are creating value."

Oldest post
http://www.datahelper.com/mi/search.phtml?nofool=y...

then better description with a follow up a few years later.
http://www.datahelper.com/mi/search.phtml?nofool=y...

somewhat related but more recent post
https://www.shrewdm.com/MB?pid=323886767

this one is more about the potential utility of the smoothing as being a better metric of value than "current" value estimates from book or assets/earnings
https://www.shrewdm.com/MB?pid=910227142

Note, these posts address the question "If a person retiring today had nothing but a big block of Berkshire shares, what's a safe withdrawal rate for income to last through retirement?".
They are not a recommendation that that's the way to go~~

Jim

(1) Those that don't have enough money to support themselves till death. No amount of fiddling with formulas will help that situation, they must rely on whatever pensions are offered them by governments or perhaps an ex-employers or kind hearted relatives.

This is the group for whom it is most important to calculate how much they can afford to withdraw from their meager saving, so that it will last long enough. I suspect that most of them are not equipped to do so.

Elan

thanks Jim, that's reassuring

Over at Bogleheads there is the Variable Percentage Withdrawal method/spreadsheet (VPW).

https://www.bogleheads.org/wiki/Variable_percentag...

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