Make the Most of Your Money With the Periodic Reset Strategy

the four percent rule as originally popularized by retired financial advisor william bengan has been the standard bearer for retirement which raw approaches in popular financial media since it became widely recognized in the 1990s however that isn't to say it doesn't suffer from its fair share of flaws one of the most commonly cited being its tendency to leave a lot of money on the table so to speak in retirement take a look at this chart it shows the amount of money left over after a 30-year retirement for someone who retired with a 1 million nest egg and followed the 4 rule as originally intended with a well-diversified portfolio of stocks and bonds it's pretty crazy isn't it not only do you usually have money left over but a lot of the time you have more money at the end of the 30 years than you had when you first retired i actually had to cut this chart off at five million dollars because it was just getting ridiculous for those curious here are the averages and the extremes of the results what this means is that if we had known how things were going to play out we could have taken a lot more of our money out to fund our lifestyles in retirement than the four percent rule allowed or alternatively we could have retired a lot earlier with less money put away sure in that case we wouldn't have had as much money to pass on to the next generation or a cause that we support but we could have had a lot more time to live out our golden years doing the things that we enjoy which can be pretty valuable in and of itself but that's just a weakness inherent to the four percent rule or at least it was because today we're going to be discussing one simple tweak that'll allow you to take advantage of the major strengths of the four percent rule like its income stability and ability to maintain buying power over extended periods of time while simultaneously being able to put more of your money towards the things you enjoy let's talk about the pros and the cons of the periodic reset withdrawal strategy but before we get going be sure to like this video if you haven't already as it really does help out the channel a lot and subscribe with notifications on for more money related videos like this one every single week and if you want to further support this channel you can check out some of the links i've left in the description below which includes a link to the investing platform m1 finance get started investing for free today before we get into the analysis for today's withdrawal strategy i want to discuss how we'll be grading the strategies in this series basically we'll be looking at four criteria for each approach the first is how much income they generate more income is obviously better but we'll also be giving a little extra credit to strategies that generate additional income early on since we're more likely to be healthy and energetic enough to take advantage of that income in our younger years than when we're 90 somethings the second is risk and sustainability this criteria basically measures how likely you are to outlive your savings using the strategy as well as how easy or difficult it might be to follow the rules laid out by the strategy third is the predictability or stability of the income stream the strategy generates basically this criteria looks at how often your income rises or falls on an inflation-adjusted basis from year to year as well as how big those changes are and fourth is how well the approach manages to maintain or raise your buying power over time which criteria will ultimately be the most important to you will depend on your goals financial situation and personal preference and because the performance of withdrawal strategies are often heavily influenced by the mix of investments you happen to have we'll also be looking at each approach under a conservative moderate and aggressive asset allocation as shown by this chart with that being said let's get into today's strategy so real quick for those who don't know here's how the strategy works in the first year of retirement you will withdraw a certain percentage of your nest egg to live on just like you would if you were following penguin's four percent rule and just because we'll be comparing this approach to bengal's four percent rule today i'm gonna use four percent as the withdrawal rate though that's not a hard and fast rule you may want to use a different rate depending on your own financial situation and goals but anyway every year thereafter you would draw the greater of the value of your nest egg times your safe withdrawal rate or the previous year's withdrawal after adjusting that amount for inflation and i want to reiterate here because otherwise it may cause some confusion you're comparing your previous year's withdrawal amount not what the original four percent rule would have you withdraw in these subsequent years so you're not keeping track of two separate withdrawal strategy calculations here think of it like you're retiring for the first time each and every year you calculate what your withdrawal should be based on the size of your nest tag at the time and your chosen safe withdrawal rate and if that number is higher than your previous year's withdrawal amount adjusted for inflation it becomes your new baseline for future calculations i hope that makes sense here's a chart to show how this approach differs from the original four percent rule the market value and income figures have been rounded down to the nearest 100 as you can see this one simple tweak can make an enormous difference in the income that you generate from your savings so that's how the periodic reset strategy calculates its withdrawals but how well does it stack up in regards to our four criteria as usual we'll start by examining its historical income generation capabilities the first factor i look at when analyzing withdrawal strategies is income as you can see from the chart on your screen now in terms of income generated on a one million dollar nest egg the periodic reset approach generally outperforms the forty thousand dollars a year that we'd expect to generate using a standard inflation-adjusted approach even if we had the benefit of hindsight and could use the 30-year safe withdrawal rate that you could have historically sustained for each starting year which for the record would have given the inflation-adjusted approach average annual incomes of about 51 thousand dollars 64 100 and 75 300 per year under the conservative moderate and aggressive allocations respectively the periodic reset approach still outperforms more often than not using the aggressive allocation though it does fall a bit behind using the conservative and moderate allocations the story remains largely the same when we look at the performance during the early years of a drawdown period the periodic reset approach generates north of 40 dollars a year more often than not over the first five years of a retirement period the second factor i look at when analyzing withdrawal strategies is risk and sustainability risk or the likelihood that you'll outlive your savings examines a couple of metrics the first is what i call the approaches survival rating or the percentage of possible retirement starting dates that you would not have run out of money over a specific length of time in this series i'm using 30 years as the time frame to determine if an approach survived retirement the second is what i call the approaches depletion time or how long the approach survives in its worst case scenario this is important to consider because while two approaches can have the same likelihood of making it at least 30 years or whatever time frame you use for your survival rating they can have wildly different worst case scenarios similarly two approaches can pose different risks even if they both have 100 survival ratings if one approach has a depletion time of 50 or 60 years compared to the other's approach which only lasted 30 years in its worst case scenario sustainability considers how easy or difficult an approach is to maintain given the experience its strengths and weaknesses are likely to produce starting with the survival rating we see that the periodic reset approach does give up a little bit of ground which is unsurprising given that it generates higher incomes during good times but doesn't actually do anything differently to correct for tough times on the bright side with the moderate allocation both approaches managed to last 30 years or more regardless of the starting date used however the standard inflation-adjusted approach held a six and eleven percent edge in terms of survivability under the conservative and aggressive allocations respectively in terms of the worst case scenario both approaches lasted a minimum of 22 years using the conservative and aggressive allocations and 30 years using the moderate allocation so in the end the periodic reset approach is a little bit riskier whether the additional risk is worth the reward of superior income generation is up to the individual investor to decide in terms of sustainability both approaches will likely be similarly easy to use any differences that may come up in this regard largely come down to personal preference what i mean by that is this based on history we know that more often than not the standard inflation-adjusted approach following the four percent rule will lead to an ever larger nest egg as the years go by because by the very design of its setup you're preparing yourself for a worst-case scenario based on the historical data we have available to us if that worst case scenario doesn't materialize then you're likely to have some extra money left over and this can be difficult to deal with for some people i mean don't get me wrong if it's a problem then it's certainly a good problem to have but as we discussed earlier if your nest egg is growing over time possibly to as much as 5 or even 15 times its original value the temptation to break from the withdrawal rules and give yourself a larger income can grow and while doing this is not likely to be too detrimental as long as you you know don't let yourself go overboard it does still factor into how easy or difficult the approach is to stick to over the long haul the periodic reset approach has the exact opposite dilemma since you're periodically resetting your withdrawal calculations based on the market value of your nest egg it's unlikely to grow to several times its original size over time in fact you may find yourself draining your nest egg as the years go by and that can be stressful for some people as well so which approach is likely to be more sustainable for you likely comes down to which dilemma you would find more difficult to manage the third factor that i look at when analyzing withdrawal strategies is the predictability or stability of income streams that it produces and in this regard it's basically a wash in terms of downside protection both approaches will manage to at least allow your income to keep pace with inflation over the years assuming you don't outlive your savings however on the upside the winner is clearly the periodic reset approach as it will occasionally allow your income to rise faster than inflation and sometimes it's by a quite substantial amount i should note that the biggest drop figures for the conservative and aggressive allocations are so high because the income is going to zero or very nearly zero from wherever it was in those rare instances where the approach failed to last the full 30 years in the vast majority of instances including all of the possible start dates for the moderate allocation when the approach doesn't outlive its savings the biggest drop would have been zero dollars the fourth and final factor i look at when analyzing withdrawal strategies is buying power and in this case the clear winner is the periodic reset approach when you get right down to it seeing your income rise in line with inflation is good but seeing it rise faster than inflation is better it really is as simple as that in this case so in the end what we've got are two very similar approaches however the periodic resets small tweaks allow it to generate noticeably larger incomes early on and overall at the cost of slightly elevated risk levels both should be relatively sustainable though personal preference may lead you to grading one higher than the other in that regard in terms of the stability of the income streams both are roughly equal when it comes to downside protection but the periodic reset approach shines when looking at the upside potential this elevated income ceiling relative to the standard inflation-adjusted approach also gives it generally higher marks in terms of long-term buying power but what do you think are there any pros or cons to either of these strategies that you feel i've missed let me know in the comments section below but that'll do it for me today once again if you enjoyed this video be sure to smash that like button if you haven't already subscribe and hit that bell next to my name so you'll be notified of all my future uploads i generally upload every single monday and if you have a friend that would be interested in this kind of content be sure to share it with them let's really get this information out there and start our own financial revolution

Channel: Next Level Life

Views: 13,959

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Id: Nznq6aSkt5E

Length: 11min 10sec (670 seconds)

Published: Mon Mar 14 2022