Guiding Withdrawal Strategies to Avoid Capital Depletion
Prior to the shot clock, basketball teams facing superior opponents would sometimes stall the game by maintaining possession and refusing to shoot. While these were incredibly boring games to watch, the strategy produced much closer contests by frustrating the superior team and reducing its time of possession and shot attempts. If the goal was to win, as opposed to entertain, this was a prudent strategy for outmatched basketball teams to utilize! It’s critical for modern American retirees to have a withdrawal strategy as thoughtful, for ‘the early retirement bear market’, inflation, and numerous other perils threaten widely dreaded capital depletion. Consider the following approaches as you design your own retirement income plan:
The 4% Rule seeks to sustain capital for 30 years by withdrawing 4% in year one and adjusting for inflation each subsequent year. This system was built on assumed equity exposure of 50% and has proven less effective with less equity exposure. Other risks include the probability portfolio returns don’t measure up during periods of high inflation and non-allowance for the natural spending patterns of retirees.
The Guardrails Approach involves setting a withdrawal rate based on personal risk tolerance and then adjusting annually within set boundaries based on performance. While this is a more dynamic strategy than the 4% rule, the possibility remains that market returns fall below the low range set for withdrawals, resulting in capital depletion.
The TIPS Ladder consists of a portfolio of Treasury Inflation-Protected Securities with varying maturities. This approach offers a steady flow of income, liquidity, and a level of capital protection during periods of high inflation. Drawbacks include less income than other types of bonds, interest rate risk, and little potential of stock-like returns.
The ‘RMD-Only’ Approach is self-explanatory, but while this strategy provides the highest assurance early capital depletion will be avoided, a small percentage of retirees will receive sufficient income to meet retirement expenses from Required Minimum Distributions alone. This approach also doesn’t account for early retirement.
Other income strategies can also work well in specific situations, like The Safe Withdrawal Rate, which is a simple annual computation of withdrawals that will limit portfolio declines, and The Hurdle Rate, which pursues investment options most likely to match withdrawal amounts.¹ Think of all the lousy basketball teams that won games by hogging the ball and then hitting a big shot at the buzzer, and be creative when planning your retirement income strategy. Be sure your planning includes income duration, market risk, inflation, and projected rates of return. Remember the biggest aid to income and capital sustenance is fiscal discipline, and realize your plan needn’t be conventional, but effective.
May the Great Provider bless your income planning efforts!
Shaun.
“And my God will supply every need of yours according to his riches in glory in Christ Jesus” ~Philippians 4:19
1 Smart Asset, “What Are Safe Retirement Withdrawal Rates?”, March 14, 2024,
The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.
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