|
About
Defined Withdrawals
Many
people assume that managing money for income is simply a matter of
selling investments as needed from a diversified portfolio.
But
there are hidden dangers in this strategy (or lack of strategy) that are
not immediately obvious. It is tempting to assume that the ups and
downs of the market will balance out over time, or that at least one asset
class will always be in favor. In reality asset classes often rise
and fall together, and a few bad years can quickly devastate a portfolio
to the point where it is no longer possible to recover---even
after the market does.
The underlying
problem stems from having to sell investments for income during down
markets. Strategies
and software tools that acknowledge this risk tend to focus on
identifying the withdrawal rate that can withstand either
worst-case hypothetical or worst-case historical scenarios.
But this approach fails to address the underlying problem, and
retirees are often forced to live on less income, leave less to heirs, or
live with less certainty than might otherwise be possible.
The Defined Withdrawals
strategy combines Income Ladders with Flexible Stock
Holding Periods to minimize the risk of having to sell stocks during
down markets. The fixed-rate investments that make up the
Income Ladder provide essentially
guaranteed income for a predetermined number of years. This makes it possible
to hold stocks for the long-term when necessary. Over time stocks
are sold to extend the income ladder. But if the market crashes the
day after the plan is executed, the investor isn't forced to sell stocks at bargain-basement
prices to meet income needs. He or she can take comfort in
knowing that near-term income is secure while waiting for a more favorable
selling opportunity.
Some people
confuse this approach with market timing. But Defined
Withdrawals is not about moving in and out of the market on a
routine basis or attempting to predict which direction the market
will move in the short-term. The idea is simply to
periodically review
the portfolio, typically on an annual basis, and use some logical
criteria to decide whether or not it is a favorable time to sell
stocks.
|
Decision Criteria
|
Sell
|
Hold
|
|
Have the plan
benchmarks been met or exceeded?
|
Yes
|
No
|
|
Are stocks at or
above trend-line?
|
Yes
|
No
|
|
Am I beyond the
minimum planned holding period?
|
Yes
|
No
|
|
Am I nearing the
maximum planned holding period?
|
Yes
|
No
|
|
Are interest rates
at higher levels?
|
Yes
|
No
|
There are many fad strategies that give excellent advice for
investing in the recent past. But the
Defined Withdrawals
strategy has proven the test of time.
We are pleased to report that retirees who have adopted it during
the past 15 years are some of the happiest people you will find!
Click here for a real-life account. The Defined Withdrawals strategy was developed based on
a broad look at historic risks and market cycles.
We studied the very worst periods in history to understand how a
retiree could have survived (see the creators' 1998 article titled, “Navigating
an Investment Storm”).
In the early days of developing the
Defined Withdrawals strategy, we never intended to sell software or
seminar products. The
strategy and the original Investment Scenario Generator or ISG
software tool were simply developed to help
clients.
In time we came to realize the power of the
methodology. With over 70
million baby boomers on the brink of retirement, during a time of
disappearing pensions and increasing longevity, the Defined Withdrawals
strategy fills a critically important gap in modern-day retirement
planning.
Click
here for answers to frequently asked question about the Defined Withdrawals
strategy and the Retirement Income Navigator™
software.
|
