KEEPING YOUR WITS
IN STORMY SEAS:
CONFIDENTLY ADVISING CLIENTS
ON SUSTAINABLE WITHDRAWALS
WHEN ALL HELL BREAKS LOOSE
FPA of the Philadelphia Tri-State Area
Jonathan T. Guyton, CFP®
Principal
A Humble Boldness …
God …
Grant me the serenity to accept the things I
cannot change,
The courage to change the things I can,
And the wisdom to know the difference.
~ Serenity Prayer
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© 2004 Cornerstone Wealth Advisors, Inc. All rights reserved.
Outline for Today’s Session
Synthesizing Withdrawal Rate Research
Client Conversations and Withdrawal
Policies
Real-Time Decisions: You Make the Call
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BUT FIRST …
CHECK IN WITH
YOUR OWN BELIEFS
Decision-Making Believe-It-Or-Nots
A severe market decline is the most
significant risk to the long-term
sustainability of ongoing distributions
from an investment portfolio.
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© 2004 Cornerstone Wealth Advisors, Inc. All rights reserved.
Decision-Making Believe-It-Or-Nots
Since withdrawal rates vary
throughout the distribution period,
they need to be kept low during bear
markets but can be allowed to rise
during bull markets.
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Decision-Making Believe-It-Or-Nots
The primary purpose of portfolio rebalancing (and the measure of its
effectiveness) is to maximize the
expected rate of return and, hence, the
expected future value.
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Decision-Making Believe-It-Or-Nots
Relative to the impact of investment
policy decision-making, withdrawal
policy (mid-course adjustment)
decision-making has little impact on
the size and long-term sustainability
of the initial withdrawal rate.
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© 2004 Cornerstone Wealth Advisors, Inc. All rights reserved.
Decision-Making Believe-It-Or-Nots
The retirement planning software you
use models the effect of the strategic
mid-course withdrawal adjustments
you would make to a client during
their distribution period.
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Decision-Making Believe-It-Or-Nots
Skillful decision-making in times of
both emotional and economic stress
requires skills that call on both the
financial planner’s left-brain and
right-brain, both the head and the
heart.
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© 2004 Cornerstone Wealth Advisors, Inc. All rights reserved.
SYNTHESIZING
WITHDRAWAL RATE
RESEARCH
Withdrawal Rate Research
Static Withdrawal Policy
 Behavioral auto-pilot
 Inflation-adjusted withdrawals (WDs) … regardless
 Research Version 1.X
Dynamic Withdrawal Policies
 Behavioral flexibility during withdrawal period
 Mid-course adjustments … when triggered by
quantifiable pre-determined criteria
 Research Version 2.X
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Version 1.X: Static Withdrawal Policy
Historically-based studies sought to maximize
IWRs without failure in any 30-year rolling
period
Stochastic studies sought to maximize IWRs that
would achieve a 99-100% probability of success
over 30 or 40-year WD periods
Their results essentially assume that every retiree
begins withdrawals in an over-valued market
environment with a ‘perfect storm’ soon to follow.
The maximum prescribed IWR is the same even if:
 Withdrawals begin somewhere in a ‘bear market’ cycle
 Withdrawals begin in a fairly-valued market
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Version 1.X: Static Withdrawal Policy
William J. Bengen, CFP (1994, 1996, 1997)
 4.1% - 4.4% initial withdrawal rate (IWR) over a 30year WD period, depending on asset classes employed
 Asset allocation impacts maximum IWR by ~½%
Trinity Study (Cooley 1998)
 4.0% IWR over 30-year WD periods: 1926 – 1995
 Equity assets are exclusively S&P 500
Additional studies by academics and financial services
companies using similar methodologies have generated the
same 4-4½% maximum IWR using a 30-year WD period
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Version 1.X: Static Withdrawal Policy
Ongoing Withdrawal Rates Change!
1/1
Value
WD
WD 60/40 12/31
Rate Return Value CPI
’73 $100k $4,300 4.3% - 7.5% $89k 8.8%
’74 $89k
$4,678 5.3% -14.2% $72k 12.2%
’75 $72k
$5,249 7.3%
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© 2004 Cornerstone Wealth Advisors, Inc. All rights reserved.
Version 1.X: Static Withdrawal Policy
30-year withdrawal periods that succeed will
display a wide range of yearly withdrawal rates
The ability to discern ‘safe’ from ‘dangerous’
withdrawal rates within this wide range is a critical
ongoing advisory decision
Michael Kitces, CFP, …………………………….. (2008)
 4.5% - 5.5% safe IWR based on initial market
valuation level (‘P/E10’) over a 30-year WD period
 ‘Over-valued’ market:
4.5% IWR (ala Bengen et al)
 ‘Fairly-valued’ market:
5.0% IWR
 ‘Under-valued’ market: 5.5% IWR
 Baseline IWRs add reality of initial market conditions
 Equity assets are exclusively S&P 500
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Version 2.X: Dynamic WD Policies
The introduction of dynamic withdrawal policies
advances the findings of Version 1.X research
 Behavioral flexibility during the withdrawal period
 Mid-course WD adjustments … when triggered by quantifiable
pre-determined criteria … increase maximum IWRs by ½ - 1%
 Additional enhancements from dynamic allocation changes??
There is no free lunch here!
 Trade-offs between Dynamic WD Policies and the lower – but
constant – inflation-adjusted WDs of Version 1.X
 Disregarding the Dynamic WD policies will impact the high
probabilities of success (99-100%) that they produce
 In some scenarios, long-term purchasing power is impacted
 In extreme scenarios, Dynamic WD Policies will reduce the
higher WDs to be similar to the lower Version 1.X WD amounts
Comparing results for 30-year and 40-year WD periods
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© 2004 Cornerstone Wealth Advisors, Inc. All rights reserved.
Version 2.X: Dynamic WD Policies
Guyton and Klinger (2006) 40 years
 WD policies (WDs +/-10%) when WD rate rises/falls
20% support ~5.5% WD rate at 99+% confidence
 Portfolio Mgt. Rule can reduce failures by 15-20%
 Policies/Guardrails apply to ongoing withdrawals
 Similar results when S&P 500 is only equity asset
Bengen (2006) 30 years
 Applying ‘floor-and-ceiling’ WD flexibility (+/- 5%
from initial real WD amount) raises IWR to 4.9%
 Applies to ongoing withdrawals
Klinger (2007) 40 years
 Findings support Guyton/Klinger (06) conclusions
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Retirement Distribution Policies
Decision Rules for decision-making
Prosperity Decision Rule
Capital Preservation Decision Rule
Withdrawal Decision Rule
Portfolio Management Decision Rule
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Decision Rules and Decision-Making
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Version 2.X: Dynamic WD Policies
Dynamic Withdrawal Policy Summary
Condition:
Action:
Current WD Rate is within 20% of IWR
Increase Prior Year WD by CPI
Prior Year’s Return is Negative
Freeze income (WD Rule)
Current WD Rate > IWR by 20%
Reduce real WD by 10% (CPR)
Current WD Rate < IWR by 20%
Increase real WD by 10% (PR)
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Confidence Standards – 50% Equities
Multi-Class Equities – 40 Years
Confidence
Standard
IWR
Success Cuts/Freezes Total Year 40
Rate
/Raises
PP
PP%
99%
4.6%
100%
2/5/6
99%
103%
95%
4.8%
100%
2/5/5
97%
101%
90%
5.1%
100%
2/5/5
92%
90%
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© 2004 Cornerstone Wealth Advisors, Inc. All rights reserved.
Confidence Standards – 65% Equities
Multi-Class Equities – 40 Years
Confidence
Standard
IWR
Success Cuts/Freezes Total Year 40
Rate
/Raises
PP
PP%
99%
5.3%
100%
2/6/7
100
%
106%
95%
5.5%
99%
3/6/7
96%
98%
90%
5.8%
99%
3/7/6
92%
90%
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© 2004 Cornerstone Wealth Advisors, Inc. All rights reserved.
Confidence Standards – 80% Equities
Multi-Class Equities – 40 Years
Confidence
Standard
IWR
Success Cuts/Freezes
Rate
/Raises
Total Year 40
PP
PP%
99%
5.6%
99%
3/7/9
101%
113%
95%
6.2%
95%
4/7/8
96%
96%
90%
6.3%
94%
4/7/8
93%
93%
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Synthesizing WD Policy Research
INITIAL Withdrawal Rates (IWR)
4.5% - 5.5% Static, Valuation –based
+ 0.5% - 1.0% Dynamic Withdrawal Policy
5.0% - 6.5% Version 2.X IWR
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Withdrawal Policies in Real Life
1/1
Value
WD
WD Rate of 12/31
Rate Return Value CPI
’04 $800k $44.0k 5.5% +14% $862k 3.3%
’05 $862k $45.5k 5.3% +13% $923k 3.4%
’06 $923k $47.0k 5.1% +13% $989k 2.5%
’07 $989k $48.2k 4.9%
6% $998k 4.0%
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Withdrawal Policies in Real Life
1/1
WD Rate of 12/31
Value
WD Rate Return Value CPI
’08 $998k $50.1k 5.0% -26% $701k 0.0%
’09 $701k $50.1k 7.1% (intended) ***
*** CPR triggered as WD Rate > IWR (5.5%) by 20%
CPR lowers ’09 WD by 10% from intended amount
’09 $701k $45.1k
6.4% +25% $820k 2.7%
’10 $820k $46.3k 5.6%
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© 2004 Cornerstone Wealth Advisors, Inc. All rights reserved.
Version 2.X: Summary
Dynamic Withdrawal Policies add 50100bps to Version 1.X Static Safe WD Rates
Dynamic Allocation Policies add 3060bps to Version 1.X Static Safe WD Rates
Question for future research:
To what degree does the combined
application of these dynamic policies
impact the Version 1.X Static SWRs?
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© 2004 Cornerstone Wealth Advisors, Inc. All rights reserved.
CLIENT CONVERSATIONS
and
WITHDRAWAL POLICIES
Client Conversations
The Retirement Income Holy Grail
Maintain lifestyle – and maximize withdrawal
rates – especially early in retirement
Eliminate the chance of running out of money
Maintain purchasing power
Avoid undesired changes to after-tax income
Preserve capital for future legacy
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Client Conversations
Trade-offs and Choices
 What to pay/give up for just a bit more
 Flexibility and Mid-Course Corrections
 Policies and Products
Myths & Realities: Connecting the Wrong Dots
The Present/Future Balancing Act
Discipline and ‘One-Time Wants’
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Client Conversations
Stories Clients Tell Themselves
“If my portfolio value has fallen significantly, then
all my investments must be down significantly.”
“If my portfolio value has fallen significantly and I’m
taking withdrawals, I must be funding them by
selling assets at depressed prices.”
“We can’t enjoy life today without risking
tomorrow’s financial security. One or us is going to
have to give in.”
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© 2004 Cornerstone Wealth Advisors, Inc. All rights reserved.
Client Conversations
Being Present With Clients
Meeting clients right there in their story





Who are they in their story?
What is the fear … REALLY?
Meeting them in their fear and not absorbing it
Acknowledging where they are and calling out the noise
The power of suggestion
Telling YOUR story: Analogy, Metaphor and Humor
 The ship at sea in the (perfect) storm
 A cancer in the system
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Client Conversations
Start of 2008
 $1 million total value; $50,000 WD (5.0%)
 66% equity, 28% Fixed, 6% Cash/ST
Start of 2009
 $703k total value; $45,000 WD (6.4% after CPR)
 55% equity, 40% Fixed, 5% Cash/ST
Vertical and Horizontal Risk
 Current portfolio has $316k in Fixed/Cash
 Stock dividends are $10k annually
 $45k WD sustainable 11 years with Divs./Int./Fixed
When do clients NEED their portfolio to recover?
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Planning Policies
Bridge between client goals and the steps
needed to sustain progress toward them
Characteristics of Planning Policies:
 Broad enough to encompass new or
unexpected events
 Specific enough to be rarely in doubt about
the action to take in response
(Yeske and Buie, 2006 Journal of Financial Planning)
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Withdrawal Policy Statement
Income goals to be met
Assets to which the policy applies (“Core”)
Initial withdrawal rate
Sources of each year’s withdrawal
Method for re-balancing
Trigger points for mid-course adjustments
Type and size of WD adjustments when
triggered (freezes, raises, cuts)
Page 36
© 2004 Cornerstone Wealth Advisors, Inc. All rights reserved.
Those One-Time Wants and Needs
The Discretionary Fund
 Can relieve tension between ‘live for today’
and ‘making sure the money lasts’
 Not covered by Withdrawal Policies
 2% - 10% of retirement portfolio
 Ideally non-qualified assets
 Encourage or facilitate client conversation
about policies for Discretionary Fund use
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POLICIES IN ACTION:
A 39-Year Look Back
At A Perfect Storm
Withdrawal Policies in Action
Scenario 1
 Static, inflation-adjusted withdrawal policy
 Portfolio management rule for re-balancing
Scenario 2
 Dynamic policy: WD rule, CPR, Prosperity rule
 Portfolio management rule for re-balancing
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© 2004 Cornerstone Wealth Advisors, Inc. All rights reserved.
WD Policies in Action – Scenario 1
Start of
WD Amount 1/1 Value
WD Rate
Year 1
$42,000
$1,000,000
4.2%
Year 3
$51,300
$ 640,000
8.0%
Year 5
$61,400
$ 842,000
7.3%
Year 11
$96,500
$1,102,000
8.8%
Year 16
$113,600
$1,534,000
7.4%
Page 40
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WD Policies in Action – Scenario 2
Start of
WD Amount
1/1 Value
WD Rate
Year 1
$55,000
$1,000,000
5.5%
Year 3
$54,400
$ 609,000
8.9% **
Year 5
$58,600
$ 812,000
7.2%
Year 11
$92,100
$1,068,000
8.6%
Year 16
$108,400
$1,497,000
7.2%
** (CPR 10% real cuts in Years 2, 3, 4)
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WD Policies in Action – Scenario 1
Start of
WD Amount 1/1 Value
Year 21
$140,300
$1,795,000
7.8%
Year 26
$160,500
$2,247,000
7.1%
Year 31
$180,200
$1,732,000
10.4%
Year 39
$218,300
$ 780,000
28.0%
$1.638MM
(1973 $s)
WD Total $5.159MM
WD Rate
Page 42
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WD Policies in Action – Scenario 2
Start of
WD Amount 1/1 Value
WD Rate
Year 21
$127,100
$1,779,000
7.1% **
Year 26
$141,700
$2,371,000
6.0% **
Year 31
$152,900
$2,001,000
7.6% **
Year 39
$185,300
$1,921,000
9.6% **
** (WD Rule freezes in Years 19, 23, 29, 36)
WD Total $4.642MM $1.520MM (1973 $s)
Page 43
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The 21st Century Advisor
A Renaissance Professional
Knowledge
 Technical
 Relational
Skills
 Communication
 Sound judgment in a complex world
The Financial Lewis & Clark
Page 44
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Conclusions
Applying a few powerful Decision Rules
significantly increases Initial WD Rates
Decision rules shift key risk from “running out of
money” to maintaining purchasing power
WD policies can tell us when we need to adjust …
and when we don’t
Discretionary Funds provide balance and harmony
Enhanced knowledge and skills are needed
A trusted advisory relationship is key!
Page 45
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… And Concluding Thoughts…
Make decisions boldly and humbly
 Synthesize current knowledge
 Be clear on what you believe/know … and don’t
 Call out poor thinking
Employ planning policies before ad-libing
Page 46
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… And Concluding Thoughts…
Embrace not-knowing
 Articulate what you don’t know
 Explore what you don’t know
 Play with what you don’t know
Stay with clients when they struggle
 Tell the truth with courage and compassion
Our work is a good science … and a great art!
Page 47
© 2004 Cornerstone Wealth Advisors, Inc. All rights reserved.
KEEPING YOUR WITS
IN STORMY SEAS:
CONFIDENTLY ADVISING CLIENTS
ON SUSTAINABLE WITHDRAWALS
WHEN ALL HELL BREAKS LOOSE
Financial Planning Association
Jonathan T. Guyton, CFP®
Principal