Using Decision Rules to Create Retirement Withdrawal Profiles

Klinger, William J.
August 2007
Journal of Financial Planning;Aug2007, Vol. 20 Issue 8, p60
Academic Journal
• This paper describes an approach where retirees define their desired retirement withdrawal profiles and then establish rules for retirement asset withdrawals to maximize total purchasing power. This approach allows retirees to control their retirement; they are no longer subject to one-size-fits-all withdrawal strategies or rules of thumb. The implicit rules that financial planners use to guide portfolio withdrawals can be made explicit and tested for their effectiveness. • The paper defines three primary retirement profiles. Under the uniform profile, withdrawals are steady throughout retirement; the progressive profile exhibits increased withdrawals in real dollars; and under the aggressive profile retirees make larger withdrawals early in retirement, followed by decreasing amounts. The paper illustrates all three profiles using a $1 million portfolio over a 40-year retirement period. • After a retiree chooses the profile and the success rate that fits his or her retirement outlook, three decision rules can be applied to govern the amount withdrawn annually from investment assets and ideally boost the amounts safely withdrawn each year The decision rules are drawn from the work of Jonathan Guyton and William Klinger: the Modified Withdrawal, Capital Preservation, and Prosperity rules. • Using decision rules dramatically increases the present value of the total withdrawals over scenarios with no decision rules, while still achieving a 99 percent success rate. For example, a uniform withdrawal profile can be created using a safe initial withdrawal rate of 5.3 percent for a 40-year retirement period, versus 2.5 percent with no decision rules.


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