Retirement Withdrawals

The old rule of thumb for safe withdrawal rates from retirement accounts of 4% may not apply in coming decades.  With today’s low bond yields and above-average equity valuations a withdrawal rate closer to 3% may be more appropriate.  Additionally, determining your tolerance for variations in your retirement cash flows should be considered.

When thinking about withdrawals it can be helpful to view it on a spectrum. On one end is a static withdrawal system. Such a system assumes a retiree withdraws a percentage (3 or 4%) in year one of retirement then inflation-adjusts the dollar amount in each subsequent year. For example, if a portfolio is valued at $1 million a retiree would withdraw $40,000 in year one. If inflation was then 2%, the withdrawal in year two would be $40,800 ($40,000 * 1.02). This method delivers a stable inflation-adjusted cash flow.

On the other end would be a fixed percentage system. In this system a retiree would set an initial withdrawal rate and keep the percentage steady. Assuming a 4% withdrawal rate, a $1 million portfolio would yield a distribution of $40,000. If there was a decline in the portfolio value due to a market downturn of 20% in year 2, the withdrawal would need to be reduced to $32,000.  Conversely, if the portfolio had grown 20% the withdrawal would be $48,000. 

There are positives and negatives with each of these systems. The static withdrawal approach has the advantage of simulating a paycheck. At the same time, the static method runs the risk of prematurely depleting a portfolio if there happens to be a weak market near the beginning of retirement. This is called sequence of return risk.  The fixed percentage system addresses the sustainability issue, but cash flows are much more variable year to year. This means in a “lean” year with bad market conditions a retiree might not be able to withdraw enough to fully cover their expenses. 

The good news is that there are a couple of options that sit in the middle ground. One is a method called Required Minimum Distributions (RMD) which means each year a retiree takes a slightly larger percentage of their portfolio (due to reduced life expectancy), based on the previous year’s ending balance. RMD’s begin at age 72.  Another method uses fixed annual percentage withdrawals as a starting point and applies a “floor” and “ceiling”. This means in a bad year a retiree would slightly reduce withdrawals from the base percentage and in good years they would slightly increase withdrawals (dynamic spending strategy).  Small adjustments to retirement spending, guided by actual market conditions, can go a long way toward boosting the probability of long-term retirement success.

Each retiree should consider their tolerance for the risk of depleting their assets prematurely and the variability of cash flows as they design a plan that is customized for their lives.  Issues that should be considered are the size of their retirement assets, other sources of income such as Social Security or pensions, and willingness to adjust your lifestyle each year.

Investor Quotes

Being a successful investor means keeping your emotions in check and thinking long-term. Here are quotes from some of the greatest investment minds of all time.


“The investor’s chief problem – and his worst enemy – is likely to be himself. In the end, how your investments behave is much less important than how you behave.”

Benjamin Graham, Author, professor and mentor of Warren Buffett

“Your success in investing will depend in part on your character and guts, and, in part, on your ability to realize, at the height of ebullience and the depth of despair alike, that this too, shall pass.”

Jack Bogle, Founder Vanguard

“The function of economic forecasting is to make astrology look respectable.”

John Kenneth Galbraith, Harvard professor of economics

“The idea that a bell rings to signal when to get into or out of the stock market is simply not credible. After nearly fifty years in this business, I don’t know anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has.”

Jack Bogle, Founder Vanguard family of funds

“Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”

Peter Lynch, Former manager of the Fidelity Magellan fund

“The stock market is a device to transfer money from the impatient to the patient.”

Warren Buffett, Investor

“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”

“The intelligent investor is a realist who sells to optimists and buys from pessimists.”

Benjamin Graham, Author, professor and mentor of Warren Buffett

“You make most of your money in a bear market, you just don’t realize it at the time.”

Shelby Cullom Davis, Investor


Following the advice of great investors will lead to success as an investor if you can manage your behavior and stay focused on your long-term goals.

Does your financial advisor work in your best interests?

The Security and Exchange Commission (SEC) rule called Regulation Best Interest, which is meant to reduce conflicts of interest among brokers who sell investments like mutual funds and annuities, may have made the situation worse (see CNBC article).   According to that article the Financial Industry Regulatory Authority (FINRA), noted that there are a total of 625,000 brokers and 360,000 financial advisors for a total of 985,000.  With 300,000 of the 360,000 financial advisors “dually registered” that leaves only 60,000 or 6% of brokers/advisors that must act as a fiduciary and do what is in their client’s best interests ALL of the time.

When looking for a financial advisor you can trust, a Google search of “how to select a financial advisor or planner” will lead to some pretty simple guidelines. The top three qualifications include selecting an advisor that is Fee-Only, a Fiduciary, and a Certified Financial Planner (CFP).  A Fee-Only advisor is compensated exclusively by their clients meaning that potential conflicts of interest related to commissions for product sales are completely eliminated.  Fiduciaries are like CPAs and lawyers, and are required by law to do what is in their client’s best interests.  Financial advisors that are CFPs are held to a higher standard than brokers and advisors without the CFP designation. To earn and maintain their CFP designation an advisor must adhere to the following rules noted here

Von Holt Financial Advisors has been a Fee-Only advisory firm and acted as a full fiduciary since its founding in 1992.  Albert Von Holt has been a Certified Financial Planner (CFP) since 1994.  Brock Von Holt is currently studying for his CFP designation which he is expected to complete in 2021.

What is your Social Security worth and why does it matter?

When it comes to asset allocation most people only think about their portfolio in terms of stocks, bonds and cash-type investments. This is a mainstream way of thinking that leaves out one of the largest assets most people have - an annuity called Social Security. While you might think about Social Security as an income stream, it is possible to convert that income stream into a current value based on your payment amounts and life expectancy. In financial terms you are determining the Net Present Value (NPV) of your payments in today’s dollars. Thinking about Social Security in these terms can help reshape your view with regards to the amount of risk in your portfolio.  It will also lead to a portfolio that shows a much lower exposure to stocks.

For example, let’s say a couple has a $1 million portfolio that is made up of 50% stocks ($500,000) and 50% bonds/cash ($500,000). Now let’s take their Social Security payments into account. Conservatively, let’s assume their respective Social Security payments are $2,500 a month for the spouse that worked outside of the home and $1,250 for their spouse (spouses receive the greater of their own Social Security or half of their spouse’s). If we also assume they will receive these amounts for a period of 15 years (life expectancy once payments start), the Net Present Value of those payments would be $899,500 giving us a total portfolio of $1,899,500. Since these payments are assumed to be guaranteed, as they are backed by the U.S. government, we would categorize them as cash/bonds. That means that the overall allocation would be 26% stock ($500,000) and 74% cash/bonds ($1,399,500), which is a much different picture than if these payments are not considered.

You can use the following calculator to determine the Net Present Value of your Social Security payments. To give you some idea of the life expectancy to use for your calculation see the chart below which shows the probability of living to various ages.

Broadening the way you look at your portfolio will help you better understand the real structure of your retirement investments.  Including the NPV of your Social Security when assessing your overall portfolio allocation will give you a clearer picture of your real risk profile.  

Accumulation V. Distribution

A lot of people listen to Warren Buffet when it comes to investing. His ideas and strategies are great for those building their wealth like him. He has never retired despite the fact that he will turn 90 years old this year. It also doesn't hurt to have nearly $90 billion. But for the rest of us, we have to realize that there are two investment phases in our lifetime. The first being the accumulation phase. This phase occurs when we are working and contributing to the retirement plans that we will depend upon when we decide to retire. The second phase, which is called the distribution phase, is when you decide to retire and support yourself with the money you saved and invested over the years. The distribution phase requires different strategies to mitigate the possibility of running out of money or having to drastically reduce your lifestyle as you age.

In the distribution phase there are three pillars of income. They include your investments and 401(k)/IRA, Social Security, and, in some cases, a pension. The objective is to replace your earned income with these pillars so that you can continue living a similar lifestyle in retirement. 

When looking at the differences between the accumulation and distribution phases a significant factor is how you allocate your investments. In the early years of the accumulation phase an allocation close to 100% stocks is preferred because of the long time horizon you have until you will need to draw on your investments. But as you age the allocation between stocks and bonds should change. When you start to get close to the distribution phase (5-10 years out), your allocation should shift increasingly to bonds to dampen volatility and serve as a future source of regular income. NOTE: Social Security acts like an annuity that pays you a monthly income for the rest of your life with a Cost of Living Adjustment (COLA). As a result, it should be considered as a stable “asset” when designing your asset allocation plan.

Another difference is that during the accumulation phase there is no need to rebalance your portfolio since new contributions can be used to accomplish it. During the distribution phase rebalancing becomes a more complex issue because you are taking money out of your accounts. That is why it is important to hold a larger portion in safe assets, such as bonds, that will remain more stable and serve as a resource for buying stocks when their prices decline (which we all know will happen). The inverse is also true. When stocks earn sizable returns, as they did in 2019 and early 2020, it is important to take profits to fund future withdrawals by rebalancing towards bonds. Another benefit is the income that bonds will generate to further aid your withdrawals. 

The last and the most important difference between investing during the accumulation and distribution phases is behavior management. People in the accumulation phase tend to worry less about dips in the market as they have current earned income and are not in need of funds from their 401(k)’s or IRA’s. They also tend to have less free time to manage their accounts since they are busy with work, building a family, or furthering their education. During the distribution phase this all changes. You no longer have earned income and the future is already here. Market swings take on greater importance since you need the money in your retirement accounts to meet current and not so distant needs. Avoiding overreactions to market gyrations is paramount. Many times an investor feels as if they need to do something when volatility raises its ugly head. The better option is to have a strategic plan in place to avoid making short-term decisions that will have long-term negative impacts. Refer to the Investor Behavior Gap blog for more information.

Your asset allocation, diversification strategy, rebalancing tactics, and behavior management become much more important during the distribution phase and will require a greater level of care. A Certified Financial Planner professional that has experience managing clients assets during the distribution phase and has the necessary skills to help navigate both financial planning and wealth management challenges may be helpful. 

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