Guyton-Klinger Retirement Withdrawal Strategy--Is it Worth the Complexity?

hey everybody welcome back to the financial freedom show my name is rob berger today's video we're going to take a look at the guyton clinger retirement withdrawal strategy a lot of folks have asked me about it so we're going to walk through it i'm going to show you the papers it comes from i'm going to give you a lot of resources i'll link to everything below the video i'm going to show you some free calculators you can use to run simulations uh specific to your own numbers and retirement and uh going to look at a number of things including some pretty i think serious criticisms of of of the rules so that's what we're going to do today before we get started you know on the live q a show by the way it's every monday night at 7 00 p.m eastern time we'd love for you to join where i do a live q a with folks we've been talking a lot about interest rates uh where to get the best ones i've mentioned save better in the past which is where i've put a big chunk of money we're going to use for a home remodel but they've actually increased their rates just happened the other day i actually put my money through save better and save better is a company where you can basically open up one account and then invest in a number of different fdic insured uh banks uh i put my money in this one here which is a no penalty cd that's paying two point five five percent so i can i can pull the money out anytime i want yeah you have to wait seven days but then you can pull it out anytime you want but i wanted to mention sally may they have a 14 month no penalty cd and they just up their rate to 270. so that's the best rate i can find anywhere i'll leave a link below the video uh to that offer if if it's of interest to you all right so with that i want to begin by showing you the papers that give us what's called the guide and clinger rule here is the first one it was published as you can see up here in 2004 by the way this is just my app that i use to highlight pdfs and it was written by jonathan guyton and it walks through sort of a i'll call it an early version of what we now know to be guy and klinger he tested it on historical data with with a 40-year retirement scenario beginning in 1973. and he picked 1973 because for a couple of reasons one it was the start a of a bear market 7374 pretty ugly stock market uh period it also was in the early stages of what we now know is pretty significant inflation that lasted for a decade or more and then for folks retiring in 73 after you know going into the early 80s uh you know for the most part they had a good ride but then they had to live through the 2000 2001 2002 tech bubble crashed really the worst stock market declined since the great depression and now here we are in 2004 and uh jonathan guyton publishes this paper and so it kind of made sense to pick that time period to look at and then two years later he and william klinger sort of refined some of those uh that model that he came up with which we're going to walk through and published this paper which is where we get the guyton klinger strategy from and i'm going to scroll all the way down again i'll leave links below the video for all of this here is sort of a summary of their findings for a 30-year retirement they also looked at 40 a year we'll walk through some of these uh numbers but before we do we need to understand the decision rules uh for this strategy and i'm going to just sort of warn you up front they're a little convoluted uh conceptually though they're easy to understand so with that what i've done to try to help all of this is i created a cheat sheet here it is again i will link to this uh it's just a pdf guide and cleaner decision rules and what i've simply done is cut and pasted from that long paper that we just looked at the basic rules the first one what's what we're going to do is we're going to walk through them and then we'll go back to that chart and and look at some of the data so the first rule is what they call the portfolio management rule in a way what you could think of this is sort of a rebalancing rule but the way they do it is they they create a sort of an order of operation uh as to where you're going to take your money from during when you're going to pull a distribution and it's a very convoluted process underlying this is this idea that you're going to have multiple asset classes you're going to have large cap value and large cap growth to say it's two separate funds rather than say a single s p 500. small cap value small cap growth uh maybe a reit so you have this sort of multi-asset approach and then at the heart of the portfolio management rule rule is this number two where you're going to first draw on distributions from any equity classes that are overweight meaning the allocation you started with they've they've the allocation has gone higher than that because maybe they did really well that year then you're going to take from any overweight and fixed income then if you still need more money to to get to your distribution number for that year you're going to draw from cash and if you still need money you're going to withdraw from any remaining fixed income assets and then if you still need money well you're probably in trouble but you're going to withdraw oops here we go from any remaining uh equity or stock assets now you know there's a little a few more nuances to this rule but that's sort of the heart of it and frankly it's the kind of rule that i don't think anyone as a practical matter would follow now there is some good news in the paper they basically say you know this rule doesn't really add that much and in fact they test uh their met their withdrawal strategies on a much simpler portfolio involving just an s p 500 for stocks so that's kind of what we're going to focus on it would be hard honestly for me to recommend this portfolio management rule to anybody very convoluted fortunately the rest of the rules are fairly straight forward here they are first one is the inflation rule and it's pretty straightforward you're going to adjust your distribution amount each year by by the rate of inflation as measured by the cpi in that sense it's no different than bill bingan's 4 percent rule however right here you'll cap your increase at six percent so if inflation happens to be higher than six percent uh then you you won't take that increase you'll cap it at six percent and you'll never make up the difference so if inflation ends this year at eight and a half percent and you were following this rule you'd increase by six percent and that that extra two and a half percent you'd sort of just lose forever right so fairly i think fairly straightforward to follow that rule that's the inflation rule then we have a withdrawal rule and what the withdrawal says is look yeah you've got the inflation rule but actually in some years we're not even going to take that capped six percent in some years we're not going to increase for inflation at all when is that well it's when two things occur the first is your portfolio as a whole is down you had a negative return for the year and that year's withdrawal rate so you figure out what your distribution would be and divide it by your portfolio balance and you get some percentage right if that percentage is greater than the initial withdrawal rate you started with at the beginning of retirement so maybe a little convoluted but not too bad to follow now you'll notice the second part is in italics the reason is this at the beginning of the paper their initial withdrawal rule didn't have this part of it it simply said if your portfolio return is negative you don't get an increase well they softened the rule a bit and this they do this and they talk about it in sort of in the middle of the paper and say you know we don't have to be quite that stingy we only really need to invoke this withdrawal rule and and uh forego and increase if your portfolio is negative and that that year's withdrawal rate would be greater than your initial withdrawal rate so there it is now uh two more these are really important and these these next two are really what we've called called in the past guard rails these are the guard rails the first one's called the capital preservation rule the concept behind this rule is uh if things are going really bad stock market's down inflation's up you need to take a haircut you need to reduce your just your distribution so um here's the deal the capital preservation rule applies when the current year's withdrawal rate so again you'd calculate what your withdrawal should be and then you turn it into a percentage by dividing it by your portfolio balance say at the end of last year if it's risen 20 or more more than 20 above the initial withdrawal rate so as an example um if we started with five percent as our initial withdrawal rate uh 20 percent above that five twenty percent of five is is one so if if our rate went above six percent it would trigger this rule so you know we we take we calculate our distribution for a year we divide by the end say the the portfolio balance at the end of last year if that's more than six percent it triggers this capital preservation rule now they didn't make an exception they said look if you're within the last 15 years of your planning age if you if you're planning to live to be 100 and you're 90 you don't have to follow this rule and i think the thought there is you've got so little time left as depressing as that may be that you probably don't have to worry about the rule that was maybe the idea so assuming this rule is triggered you you reduce your withdrawal by 10 that's what you do and um the decreased withdrawal becomes the basis for terminating the determining your future withdrawal uh withdrawals you don't ever make it up again so that's the capital preservation rule the prosperity rule is kind of the opposite it's when your current year's withdrawal percentage again you've calculate your distribution divide by last year's ending portfolio balance if your current year's withdrawal rate is less than four percent so that means things are going really well you're not taking that much of your portfolio again inflation might be low stock market might be doing great if it's below four percent you can take an increase of 10 so you can think of those as those really the guard rails the capital preservation rule protects you when bad things are happening the prosperity rule rewards you uh maybe when good things are happening so that's the idea so yeah definitely a more complicated more complicated rule uh there's a set of rules so what's the outcome well let's go back to the chart so again this is a 30-year withdrawal rate and all of these abbreviations you can see so w initial withdrawal rate right um is what that stands for and and the triggers you can think of those as um those guard rails we talked about and there's remember there's kind of three of them there's cuts so that would be um you know what that would be the capital preservation rule where you reduce your spending there's freezes that's sort of where um you know your portfolio went down and your withdrawal rate was higher than your initial withdrawal rate so you didn't take a inflation adjustment and there's raises that's the prosperity rule and this shows you how many times those were triggered under these different scenarios right and so what i want to look at you know here's multiple class equities is down here that's again the the portfolio rule it's very convoluted i kind of like to keep it simple and you can see he's got three different asset allocations the first number is equities second number is fixed income the third number is cash so this is overall if we combine fixed income in cash this is 50 50 65 35 80 20 a couple of things to note 10 in cash is a lot i would never recommend that um that is a lot of money now if we reduce that to some smaller number i don't know the impact it would have on the results um i would think that it would have a positive impact at least most years or most retirement scenarios but i haven't actually tested that but that's just an observation so we can look at let's just do the 65 35 these are confidence levels so in other words they ran the monte carlo analysis and how many times you know did it succeed or fail and so at 99 using a 6535 portfolio you could actually start with a 5.2 percent initial withdrawal rate significantly above uh the 4 rule if you did this you would have had to cut your spending twice right that's on average on average uh you would have had to have foregone a inflation adjustment six times but the bright side is you would have had seven races so it kind of washed out and your purchasing power total turned out to be pretty consistent across all of those time periods and your final year purchasing power i'm not sure how much that matters if your final year you're 100 maybe it does actually went up in this scenario 111 percent you'll notice that these numbers go down typically right we're looking at this these boxes here in the middle as your initial withdrawal rate goes up and your initial withdrawal rate goes up if you can if you're comfortable lowering your confidence how many times you know the percentage of times that are successful hope that makes sense so for example if you were comfortable with the 90 confidence level you could actually start with a 6.4 initial withdrawal rate it succeeds most of the time but not all the time you can see the cuts freezes and raises and you actually end up it's right here you end up getting a bit of a haircut in terms of purchasing power but one can argue that you know it's not terrible and then you've basically got the same numbers down here but with an 80 20 uh portfolio now i know that's kind of convoluted and the the trouble i have with the paper is i it's hard to say what should we do should we actually follow a fairly complicated set of rules even if we ignore the multi-asset portfolio and the portfolio rule it gets pretty convoluted on the other hand i like the idea of basically making mid-course adjustments either if things are not going well and i need to cut back or if things are maybe going better than i might have expected and i can take an increase i like knowing that and i think the guidance clinger rule is probably from what i can tell one of the more practical ways to accomplish that and the capital preservation and prosperity rules aren't really that complicated to use frankly and neither are the inflation or withdrawal rules so if we ignore the convoluted portfolio rule the others are not too difficult i think to follow having said all of that there is some pretty big criticism of this rule and i think it's only fair to share that with you so to do that i want to go to a website and here it is this is early retirement now and this is a well-known site uh the blogger behind this uh has done a great series on safe withdrawal rates you can see it here i highly recommend it i'll link to this article and he's looking at the guy klinger rules i can tell you he's not a fan and you can read this article of course on your own but what i want to show you is all the way down at the bottom here it is uh oops no that's not it you know that is it what this is showing this blue line you can see it up here and it goes straight across this is the four percent rule and this is all after inflation so as we know the four percent rule is a constant dollar after inflation spending so on an after inflation basis the amount you spend every year is the same straight line right these are guyton clinger lines with with different initial withdrawal rates four five and six percent and you can see at least with five and six of course they start out with much higher well obviously one and two percent higher withdrawal rates right the point uh that that's being made here though is that in this particular uh time period which begins retirement in january of 1966 on an after inflation basis how much you can spend takes a nose dive pretty early on right year four i guess into year five and regardless of whether you start with four or five or six percent the guy clinger method ends up with pretty significant shortfalls uh you're spending about half the four percent rule down here for years and during the entire 30-year period you never actually recover and so that was i think at the heart of the criticism of this rule and the criticism was twofold it was not only that depending on when you retire you could end up spending a lot less on an after inflation basis but that guy and klinger didn't really do a good job of explaining that in fact i think some would say boy did they hide it from us why isn't that in the paper now i don't think i'm as uh negative on guy and clinger for a couple of reasons let me go back to this paper the first thing is in doing this analysis the author didn't actually follow uh guyton klinger to you know to the letter but change the rules in a couple of ways the first thing sort of ditch that whole portfolio rule now i don't blame them i i'd buy ditch it too uh but the other you know but still if you're going to criticize the rule you probably ought to test it exactly as is now again in the guidance paper they pointed out that that that rule probably doesn't add a lot so one could argue you know that's maybe not um a big deal but they also changed a few of the other rules the first thing was they rebalanced on a monthly basis when they did their analysis here and that's not what gaiden klinger did and in fact i think that could have a non-trivial effect on the results because a lot of studies show that rebalancing on a monthly basis is not ideal and in fact we had paul merriman on the show now it wasn't in the context of greiten clinger but in his uh ultimate buy and hold portfolios he showed that if you rebalance monthly you know over long periods of time you actually get worse results there's also a practical side i don't know very many people that actually rebalance monthly so i think that aspect of the rule um um you know i think it would would have been better to test it with that part of the rule and left in the other thing is i'm coming back over to this part the withdrawal rule remember i said in the middle of the paper guyton klinger added this well in this paper they didn't factor that in they also got rid of the rule that said in the last 15 years you you can ignore uh that the the inflation rule and so there were changes to the guidance clinger methodology that generated this table right here that we just looked at now having said all of that i still think the point being made here is a valid one if you pick the worst imaginable time to retire in this case 1966 yeah the guidance clinger and frankly just about any dynamic spending rule you're going to end up spending less than um at some point than you would have if you just followed a straight four percent rule and in fact they call that the crossover point and how soon you'll cross below that four percent line and again we go back here you can see it visually at what point will any dynamic spending rule cross below just spending a constant dollar in this worst case scenario it happened right away but of course you know we've looked at about 150 years worth of retirement data this normally doesn't happen this is the worst of the worst so i suppose this graph is important if you really truly truly want to plan for the absolute worst scenario at least based on historical data in most cases uh you may not never cross this four percent line of if you retire in a quote unquote you know good year but in other cases uh you know you might cross it in year 12 or 14 or 16 or 18 way out here and that actually might not be a bad thing particularly if your spending overall tends to go down as you age and in fact in this first paper that that jonathan guyton published in 2004 he talks a little bit about those crossover points so you can check that out in this paper if you're interested all right i know i've thrown a lot at you i do want to give you two other resources to consider the first is fi calc this is a calculator a free calculator we've looked at in the past and i'll just so you can see the whole thing and um you can set your retirement length of retirement your initial portfolio value we can do uh you can set your equities we'll leave it there and you can set your strategy one of them as you'll see is right here guy and clinger and the nice thing about this is the capital preservation of prosperity rules remember it's 20 you know when you go off track one way or another you can change those you can change those assumptions if you want you'll also notice you can set a minimum amount of withdrawal which i think is kind of important you can also remember that whole thing about ignoring the rule in your final 15 years well here you can you can ignore that rule or not it's up to you i'll leave that checked since that's how guyton klinger did it and we can go back to the paper right here let's pick one of these we're doing 80 10 which is here and we'll do the 95 confidence level which would mean an initial withdrawal rate of 5.7 so in a million dollar portfolio would be 50 7 000. how do we do well you can see up here we succeeded about 96 percent of the time which is about right and we can come down we can look at the bad years and uh not surprising a lot in the 60s it's it's interesting here though that 66 did not actually run out of money but it certainly came close now we can pick one we'll pick 1966. this is the available spend this really gets back to the point being made here in this article we looked at here we started out at 57 000 this chart is on an after inflation basis and you can see we hit rock bottom by 1981 and we never get a raise for 30 years right so that's a a really good uh visual representation of the problem uh potentially uh with uh uh guyton klinger now of course that's the worst of the worst right if we go back we could pick a different year let's pick a probably a better year 1982. here's our available spend it does the opposite starts here and it just goes sky high so part of the question is you know are you going to retire in a quote unquote good year or a bad year and unfortunately there's no way to know in that sense i was a bit disappointed with guyton clinger because i had thought before i looked at all of this that the preservation ruled and or the excuse me the property the prosperity rule and the capital preservation rule the two guard rails i thought would help keep our our spending more in check than it was um depending on what year you retired there would be some variability i got that i didn't expect it to be so so wide depending on whether you retire in a great year a bad year or somewhere in between now of course you can use this tool and you can test out for example we could say let's trigger this i don't know at 15 percent and this one at 15. and what does that do to the numbers you can look at it there's a lot of different ways you can test this you can set a minimum withdrawal amount that's different than 20 000 so you can play with this uh based on your own circumstances your own asset allocation i think it'll be very useful the other one i'll mention is cfire sim and um again i'll leave a link to this this is a free tool as well you can put in your inputs it's pretty self-explanatory i think here's where you select guide and clinger they have a number of different spending rules you can use guyton clinger is one of them the nice thing i like about this tool is we can run multiple simulations and each one you'll see a results tab here so this was the first one that i read now just a couple of things all of these numbers that you see on are on an after inflation basis and these numbers may look this may look confusing it's pretty simple really these are portfolio values and this is spending over time and if you highlight one you'll see down here watch down here if i just pick one randomly you see that tells me that i'm looking at the cr at the year 1976 for a retirement that started in 1966 and my 1 million dollar portfolio on an after inflation basis is already down to 421. now of course that was a retirement starting in 1966 and we know that was not a great year to retire we could pick a different one we'll go here this is a retirement that started in 48 it's now i'm high i'm hovering over 1965 and our million dollar portfolio on an after inflation basis 3.8 million yeah big difference you know between retiring in a good year and a bad year you basically get the same thing over here but it's based on spending so we want to pick a bad year here we go uh you started in 1973 we're looking at 1991 our our spending started at 47 000 that's what i used for the input and we're down on an after inflation basis to only spending 20 20 000. so again it underscores just how variable the guidance clinger rule can be which frankly was a big disappointment for me now you can change some assumptions here if you wanted we could say okay well what if um we'll we'll cut back not when it exceeds 20 but when if it exceeds 15. let's just do that we'll leave everything the same you can run the simulation and it gives you a new tab so you still got your old data you're from your first simulation you could compare it to the new data and see the differences so again i think a very very useful tool now i know this has been a sort of a convoluted topic i've tried to simplify it as much as i i could but it is a complicated rule again i like the concept behind the guard rails but i think at least based on the data we've looked at there needs to be some more refinement so i'm continuing to do more research to see what others have done with this i think guard rails i like the idea of guard rails but it didn't give us the stability of of after inflation spending that i was hoping uh it would at least that was my take so in many ways i kind of agree with the results and in the opinions from this article i just wish the data that they used was more closely aligned with the actual guidance clinger rule again maybe it wouldn't have made any difference but i suspect maybe it would have made some difference although again as we saw from like fi calc still the the variability of the spending can be pretty significant so there you go again i'll leave links to all of this below the video and i will be doing follow-up videos with more research on this general topic of spending rules in retirement if you have any questions leave them in the comments below i'll be happy to help you out any way i can and until next time remember the best thing money can buy is financial freedom and maybe a good retirement spending rule that that'd be nice as well

Channel: Rob Berger

Views: 24,684

Keywords: guyton--klinger, guyton, klinger, spending rules, retirement spending rules, retirement withdrawal strategy, retirement withdrawal rate, dynamic spending rules

Id: LMUDzYWn8j8

Length: 27min 55sec (1675 seconds)

Published: Sat Aug 13 2022