The Financial Survival Guide to Retirement

1. The Financial Survival Guide to Retirement Week 2 Retirement Strategies - Advanced

2. Review • What methods can be used to simulate retirement futures? • What is good and bad about each? • Do simulations give a probability of success? • What is the 4% Rule? • What is good and bad about this rule?

3. Retirement Strategies • Last week we looked at the 4% Rule • But… • People don’t leave their retirement on autopilot • If things go badly, people cut back • If things go well, can maybe afford to withdraw more • Decision rules • The rules one will use to guide withdrawals

4. Decision Rules • Decision rules allow for a possible higher level of living in retirement • Higher initial income level over not using rules • Comparable final income level to not using rules • Greater total withdrawals over retirement • BUT – person must be willing and able to cut back, if needed

5. Retirement Strategies • How does one withdraw money from their retirement portfolio? • Need to know • How much to withdraw the first year? • How much should be withdrawn in subsequent years? • What should be done if things go badly? • Should anything be done if things go well? • Should the investment strategy change over time?

6. Terminology • Success rate – percentage of simulations that end with a positive portfolio • Confidence level – results for which the simulations exceed a specified value. For example, for a legacy at a 95% confidence level of $100,000 means that 95% of the simulations resulted in a legacy of $100,000. • Constant dollars – the dollar amount is expressed in terms of today’s dollars. Future dollar amounts are reduced by inflation. • Median – half the simulation results were greater and half the results were less than the median value. • PV (present value) – future dollar amounts discounted by inflation to today’s values. • Standard deviation – a statistical measure of how much things fluctuate. The greater the number, the greater the range.

7. Analysis • Many retirement calculators • Vanguard • T Rowe Price • Fidelity • Online calculators do not allow for testing strategies • Limited withdrawal strategies • No decision rules • No failure analysis • No market return analysis • Retirement Quant • Software written by me, originally for me • Used for my retirement financial research

8. Assumptions – for now • We’ll start with the basic $1M retirement portfolio • $1M in retirement assets • Invested 60% in stocks, 40% in bonds • Assume person is 65, will live to 99 • Rates of return • Russell 3000 index for total market • Federal Reserve Board data for 10-year Treasuries • Withdrawal strategy is 4% Rule

9. Retirement Quant • Enter data • Financial projections • What-ifs • What is the success rate? • What is the effect of different retirement income levels?

10. Let’s See What Happens • Using Retirement Quant • Start with basic $1M portfolio • We’ll test various retirement strategies • Start with 80% of pre-retirement income, grow with inflation. • 4% rule. • Withdraw 4% annually. If portfolio has a loss, only withdraw 95% of previous year’s level. • Withdraw 4% annually but have min and max income levels. • Start with higher income and decrease over time. • Use decision rules. • Reset withdrawal rate every five years to a safe level • Until age 85, draw down 1/nth of 85% of your portfolio. Purchase annuity at age 85. • Use 50% of your assets to purchase an annuity. Use 4% rule for other 50 %. Change asset allocation over time. • Invent your own and test it.