The portfolio is divided into two sections.  The first section is invested in an income ladder that provides guaranteed income for a pre-determined number of years.  The rest of the portfolio is invested in diversified stocks.  Eventually stocks are sold to further extend the income ladder, but stocks can always be held for the long-term if necessary.  The Retirement Income Navigator™ software determines the optimal balance between fixed-rate investments and various categories of stock---given the desired income, stock holding periods, and other market parameters.

An income ladder is any investment or series of investments that provide guaranteed income for a pre-determined number of years.  One good way to create an income ladder is to purchase a series of quality fixed-rate investments with staggered maturities.  By carefully selecting investments with the appropriate maturity dates you can create an income ladder that exactly achieves your desired income for a pre-determined number of years.  With this approach some of your income will come from the interest on the fixed-rate investments, and some of your income will come from principal as the investments mature.  A bank or brokerage firm can help you develop the desired income ladder.  Some annuities also work well as income ladders.

Modern Portfolio Theory provides an allocation of assets based on a client's risk tolerance.  This is an appropriate approach prior to retirement.  But Modern Portfolio Theory does not provide a plan for withdrawing income.  The Defined Withdrawals strategy fills this gap and provides an allocation of assets that is specifically designed for maintaining steady and dependable investment income.

Over time you will likely sell more shares of stock at low prices than at high prices because you will have to sell more shares when prices are low to maintain your desired income.  We call this phenomenon Dollar-Price Erosion, and it is especially devastating if an extended down market occurs during the early years of retirement.

Maybe, but historically 100% stock strategies have produced highly erratic results.  A study conducted by three professors at Trinity University concluded that over all 30-year time periods from 1946 through 1997, a portfolio consisting of 100% stocks would have been able to provide 6% income increasing with inflation (CPI) only 57% of the time.  The other 43% of the time the portfolio would have been depleted before the end of the 30-year time period.

It depends how much risk you're willing to accept.  Longer stock holding periods will require a higher percentage of fixed-rate investments.  Shorter stock holding periods will allow for a higher percentage of stocks.  If the stock market cooperates, a more aggressive allocation may allow you to maintain a higher level of income.  But it also means that you will be less prepared for an uncooperative market.  We prefer stock holding periods in the range of 8 to 12 years since historically these intervals have usually provided an opportune time to sell.

No, this is probably the most common misunderstanding about the Defined Withdrawals strategy.  The reason for the stock holding periods is not necessarily to hold stocks to the very end---but rather to give yourself some time to pick favorable selling opportunities.  Plan benchmarks and stock trend-lines can help you identify the favorable selling opportunities.  In most cases you will not want to wait until the end of a stock holding period before selling stocks.  As we like to say...Defined Withdrawals is not a Buy and Hold strategy for stocks, it's a Buy and Hold Out strategy.

One of the hallmarks of the Defined Withdrawals strategy is that the allocation changes over time.  As capital from fixed-rate investments is consumed for income during the stock holding periods, the allocation becomes more heavily weighted toward stocks.  So over time the average percentage of capital invested in fixed-rate investments is less than it appears based on the initial allocation.  We refer to this as tipping the portfolio. 

If you ask people how much income they need, they will almost always cite a before-tax value.  Most people relate to before-tax income better than they relate to after-tax income, and they actually have a better understanding of their income needs on a before-tax basis.  Few people live their lives according to a well-defined and known after-tax budget.

We recommend investing on a tax-deferred basis so that taxes are only paid on current annual income.  The book that accompanies the Retirement Income Navigator™ includes a number of examples to demonstrate how to handle various tax situations.  For complex situations we highly recommend seeking competent professional assistance. 

When implemented properly, Monte Carlo analysis can provide some insight into the range of possible outcomes for a Systematic Withdrawals strategy.  People often debate the advantages and disadvantages of Monte Carlo analysis.  But the real question is not whether Monte Carlo is a good analysis tool.  The real question is whether Systematic Withdrawals is a good strategy!  We believe that Systematic Withdrawal strategies are unpredictable by nature and therefore not well suited for providing steady and dependable income.

We do use a Monte Carlo algorithm in our free Practice Navigator™ investment income calculator.  But unlike other hands-off Monte Carlo programs, Practice Navigator™ does not assume a Systematic Withdrawals strategy.  It lets you decide when to sell stocks.

We wanted to better highlight the purpose of the product---which is to optimize steady, dependable, and long-term retirement income.  We also wanted to highlight the need for navigating as opposed to assuming that a plan can simply proceed on autopilot.  So the version 2.0 product is now called the Retirement Income Navigator™.  Previously the product was called the Investment Scenario Generator™ or ISG™ for short.