DIESEL: A System for Generating Cash Flow During Retirement

September 2006
Journal of Financial Planning;Sep2006, Vol. 19 Issue 9, p60
Academic Journal
One of the greatest challenges facing retirees as life spans increase is how to generate a sustainable, reliable stream of cash flow from their investments that has an acceptably low probability of depletion,The DIESEL process, which stands for Dividends, Interest, and Equity SElect Liquidations, can facilitate the distribution of "retirement paychecks" each month to retired clients through a process that emphasizes stability and total return. Key to understanding the process is distinguishing the difference between income in retirement, which emphasizes bond interest and stock dividend payments, and cash flow, which reinvests dividends and interest while generating retirement funds by selectively liquidating securities in a quarterly rebalancing process. Historical data challenge the concept that very low withdrawal amounts from primarily fixed-income-oriented portfolios should be a standard portfolio strategy for clients seeking retirement income. Rather, a more broadly diversified portfolio containing an optimum mix of asset classes and subclasses historically could have produced a sustainable withdrawal materially larger than the generally accepted level of 3-4 percent. In a comparison of several portfolios using historical data, the sustain ability of a 7 percent withdrawal, increased at 3 percent a year varies dramatically. When the order of returns is randomized, the portfolio failure rates also are dramatically different The DIESEL process starts with consolidating all investment accounts at a single institution. Retirees draw "paychecks" monthly from a single withdrawal account at the institution. The article also looks at how tax and transaction expense issues can affect the DIESEL approach.


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