Guyton-Klinger withdrawal model

OldScientist

Just to demonstrate what O mean about the difference between portfolios... in the following figure I have plotted the 0th (worst case), 10th, 25th, 50th (median), and 75th percentiles of real withdrawal rate as a function of time since retirement for all historical retirements (rather than just the 1937 case) for GK with an initial withdrawal of 4% and two portfolios held in the UK, 60% UK stocks, 20% UK gilts, 20% UK cash (top panel), and 30% UK stocks, 30% US stocks, 20% UK gilts, and 20% UK cash (lower panel)*



While there are obvious differences between the two cases, for example, the median WR for the UK portfolio falls below that for the UK/US portfolio towards the end of the 30 year retirement (3% compared to 4% after 29 years), it is also clear that the difference between the worst historical case (WR of about 1.5% after 29 years) and the 75th percentile (between 5% and nearly 6%) is much larger. It is not possible to determine what path a future retirement will follow, but the information in the above graph tells us that in the median historical case, GK supported withdrawals above the SAFEMAX values of 2.9% (UK) and 3.5% (UK/US), but in the worst cases, the income was lower (but the portfolio didn't run out of money after 30 years).

So, GK is a reasonable approach provide this amount of flexibility is acceptable, which in turns rather depends on expenditure, other sources of income, and the preferences of the individual retirees. For example, for a couple with two state pensions and a £100k portfolio, total real income after 30 years would have ranged from £22.5k (£21k+£1.5k from SP and portfolio, respectively) in the worst historical cases to £27k (£21k+£6k) at the 75th percentile. Of course, the variation in total income would have been larger for a couple with a larger portfolio (assuming no other sources of guaranteed income) and, again, whether this is acceptable depends on individual circumstances and requirements.

Sorry, drifting a bit of topic towards the end there!

* I'm in the middle of trying to construct a more international return series from the macrohistory.net database and actual indices (e.g., MSCI returns in USD go back as far as 1978 - this is easy enough to convert to returns in GBP), but this example will do for an illustration.

BritishInvestor

"What is the collective wisdom on this strategy?  It certainly seems sensible and common sense."

Superficially great in theory, suboptimal in the real world, hence why (hopefully) few use it. 

https://www.kitces.com/blog/guyton-klinger-guardrails-retirement-income-rules-risk-based/

SouthCoastBoy

"wealth at death" - how have you determined when you are going to die?

Secret2ndAccount

OldScientist said:

Just to demonstrate what O mean about the difference between portfolios... in the following figure I have plotted the 0th (worst case), 10th, 25th, 50th (median), and 75th percentiles of real withdrawal rate as a function of time since retirement for all historical retirements (rather than just the 1937 case) for GK with an initial withdrawal of 4% and two portfolios held in the UK, 60% UK stocks, 20% UK gilts, 20% UK cash (top panel), and 30% UK stocks, 30% US stocks, 20% UK gilts, and 20% UK cash (lower panel)*

OldScientist I wonder, would you be willing to do me a favour?  Many proponents of GK propose an initial withdrawal rate of 5% or 5.25%.  Could you plot those two graphs again with a 5% starting withdrawal. I would love to see the results.

With your 4% start point, what I see is a major difference between the UK and wider portfolios. With the UK portfolio there is a 1 in 4 chance that someone would have to halve their income, and a far-from-zero chance that would happen inside 10 yrs.  The wider portfolio reduces the likelihood of such a big cut to 10%. Considering that many people think they can safely start at 4% and never have to reduce, this would come as quite a shock.

If I told a retiree you could take 3.?% and never cut, or take 4% but there is a 1 in 10 chance you will have to halve your income within 9 years, I think that makes for a pretty easy choice...

Thanks for your contributions to this forum

OldScientist

Secret2ndAccount said:

OldScientist said:

Just to demonstrate what O mean about the difference between portfolios... in the following figure I have plotted the 0th (worst case), 10th, 25th, 50th (median), and 75th percentiles of real withdrawal rate as a function of time since retirement for all historical retirements (rather than just the 1937 case) for GK with an initial withdrawal of 4% and two portfolios held in the UK, 60% UK stocks, 20% UK gilts, 20% UK cash (top panel), and 30% UK stocks, 30% US stocks, 20% UK gilts, and 20% UK cash (lower panel)*

OldScientist I wonder, would you be willing to do me a favour?  Many proponents of GK propose an initial withdrawal rate of 5% or 5.25%.  Could you plot those two graphs again with a 5% starting withdrawal. I would love to see the results.

With your 4% start point, what I see is a major difference between the UK and wider portfolios. With the UK portfolio there is a 1 in 4 chance that someone would have to halve their income, and a far-from-zero chance that would happen inside 10 yrs.  The wider portfolio reduces the likelihood of such a big cut to 10%. Considering that many people think they can safely start at 4% and never have to reduce, this would come as quite a shock.

If I told a retiree you could take 3.?% and never cut, or take 4% but there is a 1 in 10 chance you will have to halve your income within 9 years, I think that makes for a pretty easy choice...

Thanks for your contributions to this forum

No worries... here is the same portfolio for a 5% initial WR


I'll leave you to draw your own conclusions. However, I should note that, fairly obviously, the final portfolio values were lower when the initial withdrawal was higher (e.g., for the more diversified portfolio, the amounts ranged, in real terms, from 50% of the initial portfolio in the worst case to 120% in the median case for an initial WR of 4% and 25% and 80% where the initial WR was 5%.

In other words, GK generally did a good job in trying to preserve the portfolio but at the expense of giving up potential income. However, I also note that if I stress the historical outcomes by assuming inflation was 1% higher than historically (or, looking at it in a different way, real returns were 1% lower), then the portfolio was exhausted in the worst cases after about 27 years had elapsed when the initial WR was 5%, but not when it was 4% (i.e, going for a higher initial WR reduces robustness).

I hope that helps.

Secret2ndAccount

Thank you very much OldScientist. That’s a pretty scary picture. I’ve borrowed your graph and added a grey line at 3.5 – 3.7% constant withdrawal.

Looking just at the diverse portfolio, if you start with a 5% withdrawal rate, there is a 50% chance things will go great. 1 time in 4, your income will fall below the constant withdrawal rate within 10 years, and in 10% of cases your income will halve in 9 years and never recover!

If your basic needs are met by other sources and you just want to use GK as a plan to burn down your discretionary pot, it’s an option. If this is all your money, I don’t see how you can use GK. If SORR goes against you, you are looking at a serious reduction in income. Surely it’s better to start out a little more cautiously, then up your spending if things go well.

Your initial plots used a 4% starting withdrawal which is obviously safer, but is it worth the trouble when the constant withdrawal rate is 3.5% or more?

MetaPhysical

I'm going for 4.25% + inflation on what - I hope - will be my £600k-ish pot.  I also have a 25k DB pension as well, index linked.  If there's a crash I will drop to 3%, forgo the inflation raise and use cash to make up the shortfall until recovery.

Pat38493

Have you taken a look at the VPW (variable percent withdrawal) approach - if you google that you will go to somewhere on Boggleheads and you can find some spreadsheets and explanations - basically it's an approach where you change your withdrawal every year (or even every month if you want) based on the current value of your pots and income streams.

The approach is designed to make sure that you come as close as possible to running out of money on the day you die - in theory I guess.  In practice I guess this means that you will never run out as long as you are alive.

One advantage of this is that it actually looks pretty simple -the withdrawal spreadsheet is not complicated to use.  However you obviously need to be prepared to have a variable withdrawal hence the name.

There is even a mad person on their forums who is running a simulated retirement using this approach in real time!

OldScientist

Secret2ndAccount said:

Thank you very much OldScientist. That’s a pretty scary picture. I’ve borrowed your graph and added a grey line at 3.5 – 3.7% constant withdrawal.

Looking just at the diverse portfolio, if you start with a 5% withdrawal rate, there is a 50% chance things will go great. 1 time in 4, your income will fall below the constant withdrawal rate within 10 years, and in 10% of cases your income will halve in 9 years and never recover!

If your basic needs are met by other sources and you just want to use GK as a plan to burn down your discretionary pot, it’s an option. If this is all your money, I don’t see how you can use GK. If SORR goes against you, you are looking at a serious reduction in income. Surely it’s better to start out a little more cautiously, then up your spending if things go well.

Your initial plots used a 4% starting withdrawal which is obviously safer, but is it worth the trouble when the constant withdrawal rate is 3.5% or more?

The SAFEMAX for the UK/US portfolio was about 3.5% - in the worst historical case it pretty well ran out after 30 years. The Kitces ratchet (https://www.kitces.com/blog/the-ratcheting-safe-withdrawal-rate-a-more-dominant-version-of-the-4-rule/) is an approach that allows for increases from an initial withdrawal rate if market conditions are favourable (I repeated Kitces work for the US, but have never got around to writing the code for the UK). Another alternative is a constant percentage of portfolio (i.e., not inflation linked) with an inflation linked floor and ceiling (first discussed by Bengen in 2001 IIRC). For example, setting the percentage of portfolio to 3.5%, the floor to 3% and not using a ceiling, the UK/US portfolio ended up with withdrawals as follows (same colours as before)



In the worst 25% of cases, the income gets 'stuck' at 3% for long periods, while at the median the income gradually increases with a bit of a dip towards the end. Fairly easy to implement with only two calculations.

However, if a future SAFEMAX was to be below 3%, then the portfolio would run out of money before 30 years, so the floor has to be set with some care. Of course, the required floor could be established with state pension, DB pension (if available), and RPI annuity, leaving the portfolio to provide variable amounts of income.

DT2001

BritishInvestor said:

"What is the collective wisdom on this strategy?  It certainly seems sensible and common sense."

Superficially great in theory, suboptimal in the real world, hence why (hopefully) few use it. 

https://www.kitces.com/blog/guyton-klinger-guardrails-retirement-income-rules-risk-based/

This appears to be good especially if your aim is to have a larger/less fluctuating income obviously at the expense of a smaller end pot.

It is an interesting concept starting at an 80% chance of ‘success’ as this is probably alien to a lot of people however we need to realise that that is only the starting point and adjustments will not only be made but expected.

In addition whilst many will not have large guaranteed incomes the SP goes along way to covering necessary expenditure. Using GK or VPW or another variation does not need to apply to the whole of fund - you can mix and match using Gilt/Savings ladders, fixed term annuities etc.

Great analysis OldScientist, thank you for sharing your expertise.