Withdrawal Strategies in Retirement

[2Muchfun]

I am interested to hear thoughts and feedback about this article:
http://www.caniretireyet.com/new-research-the-best-retirement-withdrawal-strategies/.  I have used the Equal Withdrawal Strategy mentioned in this article.  After reading this, I was wondering about if and when to rebalance your AA.

[steveo]

I'm not FIRE'd yet and therefore I'm not drawing down on assets however I really like that analysis. I like the CAPE strategy.

[boarder42]

CAPE looks great. Mad Fientist also has a great article about how The Shiller PE relates to your withdrawal rate in FIRE

ie lower PE much higher withdrawal rate likely.  At the current PE if you were to retire today it puts the SWR just under 4% at 3.9x for your money to last indefinitely.

so it makes since similar logic would apply post FIRE. 

[Louisville]

Wouldn't rebalancing just before withdrawing this year's money equate to about the same thing...?

[Eric]

This is interesting, but the results are counter-intuitive, which makes me wonder about the methods.  Is it really better to never rebalance?  Or to just deplete one asset class without regard to an overall asset allocation strategy?

The largest ending balance and highest success rate is with the CAPE Median strategy.  However with this strategy, if you started in say 1990, my guess is that you'd be sitting on a pile of bonds right now (100% bonds) having sold off all stocks since basically every year since 1990 has been above the long term CAPE.  I'm just not sure how viable of a strategy that is, even if it backtested well.

The second largest ending balance and success rate is the Equal Withdrawal method.  This also avoids any rebalancing. 

So both of the "best" methods avoid rebalancing.  I can't really wrap my head around why this would be the case, as I thought it was pretty much a financial fact that rebalancing is a good thing.  Hmmm...

[jasonlong1212]

I ran the numbers on cfiresim, making what assumptions I had to make, for the 100% stock portfolio and came up with a success rate of 89.7% (identical to the 50-50 portfolio on equal withdrawal strategy). Then I noticed two things: 1) CAPE suggests that the 1920s would have been a terrific time to buy stock. 2) The author deliberately chose to avoid the 1920s by making 1928 the starting point. Seems like cherry-picking to me.

[woopwoop]

I actually emailed him after this with the following questions, he said he might get to them in a subsequent post. I agree that the bond-heavy leaning up front is a big part of what's making it wonky:

Hi there, I was discussing your latest post on retirement withdrawals with a couple people, and it seemed strange that a rebalancing method did so much more poorly than the equal withdrawals. Then we realized that since stocks have a higher return over the long run, rebalancing would almost always end up in selling more stocks, thus lowering the return.

Average expected portfolio value is one thing, but the success rates are probably the most important thing for early retirees. I thought that your results leaned towards CAPE mainly because you started with a 50/50 split which is so bond-heavy that there's no way you could sell enough bonds to make your portfolio risky enough to fail. The CAPE strategy then works because it sells more bonds than any of the other strategies, and the rest of the strategies follow in order from there. Have you run a scenario where you sell off only bonds? How does that hold up compared to the other scenarios? If you started at an 80/20 or 90/10 stock/bond split, would that make the CAPE/equal withdrawal success rate lower than rebalancing?

Lastly, what about early retirees looking at a 50-year time horizon? What strategy holds up best over a really long term retirement? This is also why I'm interested in looking at a more equity-tilted portfolio than what you have modeled. I imagine the success rates will take a nosedive when looking at longer term models.

[brooklynguy]

So both of the "best" methods avoid rebalancing.  I can't really wrap my head around why this would be the case, as I thought it was pretty much a financial fact that rebalancing is a good thing.  Hmmm...

Rebalancing helps maintain a consistent risk profile (instead of leaving you exposed to the whims of the market). This article does not discuss volatility or risk (except for the risk of running out of money within 30 year historical periods).

Exactly.  Kitces put out a good article on this point last week:  "How Portfolio Rebalancing Usually Reduces Long-Term Returns (But Is Good Risk Management Anyway)"

[dude]

Speaking of CAPE-based withdrawals, this was a very interesting article I printed and saved a couple year back.  Worth the read:

http://www.bloomberg.com/news/2013-04-09/maybe-past-performance-does-predict-your-savings-future.html

[Tyler]

Rebalancing helps maintain a consistent risk profile (instead of leaving you exposed to the whims of the market). This article does not discuss volatility or risk (except for the risk of running out of money within 30 year historical periods).

Exactly.  Kitces put out a good article on this point last week:  "How Portfolio Rebalancing Usually Reduces Long-Term Returns (But Is Good Risk Management Anyway)"

An excellent point, and a nice article.  Thanks.

[Mr.Tako]

Like others have mentioned earlier in the thread, rebalancing can actually have a negative affect on portfolio return.  Thus, I've never rebalanced, and I let my winners keep winning.  Some are nearly 9 baggers now, and I've gotten more than a 100% return (over time) from dividends alone.

As far as drawdown strategies go - I can now live entirely off the dividend income without selling assets.  This amounts to a 2-3% withdrawal rate.  There may be a time when that won't be enough, if a situation like the Great Recession happens again.  With any luck I'll have enough of a buffer to not need to sell when prices are at their lowest.