Guyton-Klinger withdrawal model

MetaPhysical

What is the collective wisdom on this strategy?  It certainly seems sensible and common sense.  Obviously, no model can accommodate every possibility and all models will fail with a series of poor years early on, statistically unlikely though that would be.  But generally speaking, what do people think?  it seems "safer" than the 4% rule.

GazzaBloom

On paper, using GK appears to increase the starting withdrawal percentage you can take, but, in practice during a bad multi-year market decline or high inflation period, your annual drawdown could drop notably, so I think you need bandwidth of discretionary annual expenditure you could cut back on to make it work.

However, my personal retirement drawdown plan does include the GK rules but adjustment up or down is reduced to 5% not the 10% GK recommends. We have about 30% discretionary headroom in our planned drawdown.

You have to go into the leap of faith of DC pension drawdown, using invested assets, with a 'best as you can' retirement plan, but, no-one knows the future so plans may need to change depending on how the world turns and the enemies present themselves.

If you want compete safety then you maybe need to work longer (or a lot longer) to get a bigger pot and convert some or all of it to annuity.

MK62

It's fine as long as you can live with the cuts it "might" ask you to make, especially if the primary reason for employing GK
 is to bump up the starting withdrawal rate higher than it might otherwise be. It might look easy on a spreadsheet, but in practice, taking large income cuts might be considerably more painful. That said, GK is not alone in this regard - many of the variable withdrawal strategies share the same characteristic........

Linton

Guyton-Klinger is fine and possibly insightful for modeling/planning purposes.  But I somehow doubt that people will actually use it in practice:

Exactly how and when it is applied seems unclear. If a major crash happens exactly when do you cut your expenditure? Immediately the crash happens?  At your next annual review?  Do you cancel next year's  planned world cruise? 

Reading about it, the talk is about imposing a drop of say 5% of your previous expenditure so perhaps it is only useful; for long term management and not relevent for major events.  But plus or minus 5% is surely within real life variability.  How do you drop your expenditure by 5% in practice?  Perhaps you do things like turning your heating down by a degCand  no longer enjoy the weekend bottle of decent wine and then reverse the cuts next year - it all seems somewhat pathetic

Furtunately I do not believe such measures should be necessary if one has planned retirement and configured one's investments appropriately.  It would seem the objective of G-K is to maximise on-going income.  Why? Better in my view to keep one's normal day to day income at the level required to maintain the same standard of living as when working.  That is what you are used to.  Any extra wealth can be used for one-off discretionary expenditure.

Hoenir

Doesn't answer the eternal question of where your money should be invested at any given point in time. Get that decision wrong and any amount of planning could soon start to unravel. 

westv

I'd imagine it's much simpler to just choose a withdrawal rate and then review it every, say, 10 years or so.

Sea_Shell

westv said:

I'd imagine it's much simpler to just choose a withdrawal rate and then review it every, say, 10 years or so.

But then you set your rate at x% but still don't use it all so you have "carry over".😉

Depending on where your assets are held, you may not actually "withdraw" your %

westv

Sea_Shell said:

westv said:

I'd imagine it's much simpler to just choose a withdrawal rate and then review it every, say, 10 years or so.

But then you set your rate at x% but still don't use it all so you have "carry over".😉

Depending on where your assets are held, you may not actually "withdraw" your %

Spend more then lol!

gm0

Drawdown methods which come closest to "safety" (based on history or a set of assumptions for random simulation).  Generate for most people on most paths (i.e. personal sequence of return for your portfolio and cohort) a larger residual pot left at the end of income that was not taken.  Because income was set "too low" - just in case of the worst case scenario.

Variable income methods (of which GK is one of many) generally offer an opportunity to increase the amount of income taken (across a range of scenarios) at the cost of being prepared to accept variable income i.e. cuts if and only if a bad sequence comes along.  The method provides support to annual/rebalancing decision making. 

Indeed the ruleset is critical as "make it up as you go along" invalidates any comfort you might have taken from study and or statistical stress testing of the method.   Different parameters or pick n mix rules.  Are untested.

Some methods apply guiderails - caps and collars for upward and downward adjustment.

Such a plan can be used - perhaps in conjunction with the expected arrival of near guaranteed income - such as state pension to achieve something where the variability although unknown is somewhat bounded by the caps and collars.  The caps and collars also blunt the income improving and risk reducing impact of the variable income of course.  With all of this - there is no free lunch.  

GK (and similar) offer a way for more people more of the time to (probably) leave less for heirs and successfully extract a bit more income.  At the cost of some complexity.  

The usual probabilistic techniques via backtesting with market data or variations of it, and with montecarlo random return simulations can be used to analyse what a sensible starting rate would be and how that exact ruleset and parameters behaves.

A well behaved algorithm doesn't do anything horribly non-linear or unexpected in the data sets we apply.  If it does then there is demonstrably something wrong with it.   That doesn't prove that for "all possible futures" the retirement is secure.  Whatever horror show I predict and model - you can come and say - what about +1 

This is all explored ad nauseam in McClung "Living off your Money".  A valuable resource which provides a view both on the real but still quite limited amount methods can do for you; a value guide to a wide selection - allowing you to filter, and a view on tradeoffs of the various approaches - simple and more elaborate.

GazzaBloom

Hoenir said:

Doesn't answer the eternal question of where your money should be invested at any given point in time. Get that decision wrong and any amount of planning could soon start to unravel. 

When looking at drawdown from invested assets, holding a mix of low cost diversified global equities (such as a tracker fund) and safer "risk-off" assets such as cash, or maybe bonds/gilts can be back tested in software modelling to see if it would survive a range of scenarios to give a degree of comfort that you have enough in your pot and the right mix to launch into retirement and cover your known expenditure needs.

Trying to predict what assets to be in at the right time is market timing, do you know anyone who can get it right every time over 30-40 years?

Linton

I see back testing, G-K, SWR, Monte Carlo etc  purely of use during the planning stage.  Their real benefit is to give you the confidence to jump.  The chances are, I believe,  that you will find little relationship to post-retirement reality.

As to the "experts" I often wonder how many have actually retired and put their theories into practice.

After retirement the problem is to set up a set of investments that provide sustainable income streams with minimal ongoing management.

After nearly 20 years retirement we spend whatever we need to spend  on day to day, keeping to a constant standard of living. Any unused income goes into the cash buffer for subsequent use for one-offs.  We have no rigid predetermined budget or fixed drawdown rate.

I monitor progress with a metric of how much wealth a simple Excel year by year model, with assumed fixed inflation adjusted expenditure, annual investment return and inflation,  forecasts will be left at 95.   Nowadays I only look at it once a year  when the returns and expenditure for the previous year are updated to actuals.  As long as the wealth at death is not falling significantly nothing needs be done.  Though in the past 20 years the issue has never arisen. The wealth at death effectively provides a significant buffer which can be used for example for major one-off expenditure.