The Debate Over Retirement Income Strategies


As millions of baby boomers are either retiring or nearing retirement, there is an ongoing debate on how to manage one’s portfolio heading into and once in retirement. Here’s a glimpse into it: While at last week’s Morningstar Investment Conference, I tweeted a comment made by Morningstar’s David Blanchett about the likelihood of success for a 50% stock/50% bond allocation with a 4% inflation-adjusted withdrawal rate (the so-called 4% rule) in the current low-rate market environment. David described the odds of success as being no better than a coin toss. (Success being defined, in this context, as not outliving one’s savings.) Moshe Milevsky quickly responded by tweeting “Hopefully somebody asks him whether ‘probability of success’ or failure is a proper risk metric.”

While it can be hard to judge emotions from written words, especially a tweet, neither David nor I thought Moshe was trying to be cheeky. Rather, Moshe’s comment was reflective of the different camps or—if you prefer—schools of thought about how investors should allocate their portfolios in retirement. (Both David and Moshe have published research about retirement portfolios.) One camp calls for maintaining an allocation to stocks with systematic withdrawals (e.g., the 4% rule). The other camp calls for annuitizing an amount large enough to cover anticipated living expenses.

The systematic withdrawal camp focuses on using the portfolio to fund consumption. They suggest withdrawing a small amount from your portfolio in the first year of retirement (e.g., 4% of total retirement savings) and then increasing it each year in accordance with inflation. The actual amount that can be safely withdrawn depends on assumptions about future market returns, how big or small of an equity allocation is used and the existence of other forms of income (e.g., a pension). This can be thought of as more of a growth approach, especially since if the portfolio does well, the amount available for withdrawals will increase.

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