Retirement Withdrawals

Comments on “How Safe Retirement Withdrawal Rates Work in Practice,” by Chris Pedersen, in the November 2023 AAII Journal:

Why not just build a portfolio of stocks, exchange-traded funds (ETFs) or mutual funds that yields just over 4% and has a history of increasing dividends at a rate equal to or higher than inflation? Then you never have to worry about running out of money and can leave some to family, charity or both. The 4% model requires selling assets as those models are based in index funds and bond funds, which may never yield a combined 4%, thus you are doomed to have less when there are down or flat markets. Down markets would devastate someone trying to live on 4% of 60%/40% in most periods of time.
—Michael S. from Washington

Most of the enumerated questions in this article were answered by William Bengen in his book “Conserving Client Portfolios During Retirement” (FPA Press, 2006). Bengen advised that the actual withdrawal percentage should be monitored and that changes to the 4% rule be made when necessary. Midcourse corrections were encouraged. He also provided recommended withdrawal percentages for older retirees. The reason not to use a percentage withdrawal method is that it leads to large changes in the amounts withdrawn each year. This would make it difficult to maintain a constant living standard.
—John L. from New Jersey

Chris Pedersen responds:
Michael, I don’t know how to build a portfolio that yields just over 4% with dividend increases higher than inflation, given that yields can vary over time and even the Dividend Aristocrats sometimes lower their dividends or go out of business. If you feel you’ve done it and it will last your duration, I wish you success.

John, I agree that Bengen’s work is fine, and I meant in no way to disparage it. What I did was research answers to my own retirement questions in a way that might help others. A close read of my article and Bengen’s book will show that I added to his work by analyzing some new scenarios and investment options that could benefit investors in new ways. Like you, I encourage people to read his book.

Investing in BDCs

Comments on “The Pros and Cons of Investing in BDCs to Access Private Equity,” by John Deysher, CFA, in the November 2023 AAII Journal:

Bravo. Finally, a succinct, informative, no-sales-pitch discussion of business development companies (BDCs) with unbiased data. I have owned BIZD for many years, as well as APO and MAIN. All three have made my larger portfolio very profitable.
—David H. from Nevada

Buying one of these is too much like buying any other actively managed fund. Everything is dependent on a manager’s ability to choose investments for the holders. I wonder if the overall success rate for managers of BDCs is any better than that of mutual fund managers. Unless a manager has a stellar long-term track record and will stick around as long as I hold the investment, I’d be simply buying hope. Another problem is how to know what percentage of the distributions will be qualified dividends or long-term capital gains versus ordinary income. The huge fees on top of that are enough to keep me away.
—Robert A. from North Carolina

Allocations in Retirement

Comments on “Five Approaches for Allocating Your Retirement Portfolio,” by Charles Rotblut, CFA, in the November 2023 AAII Journal:

I noticed that the five retirement approaches described here are all versions of the 60%/40% stock/bond asset allocation. To date, the basic 60%/40% allocation has survived over 70 years without being replaced by a more sophisticated approach despite exponential advances in computers and simulation capabilities. However, it seems to me that an artificial intelligence (AI) large language application would be perfect to advise future investors, keeping in mind that the “garbage in, garbage out” principle will still operate.
—Barry J. from Texas

Barry, I take issue with your statement that the strategies are all versions of the 60%/40% asset allocation. Obviously, the glide path strategies discussed will only be 60%/40% in the year one is 60 years old (assuming the starting point is 100). Less obvious, perhaps, is the realization that the equity/bond ratio in James Cloonan’s Level3 withdrawal strategy is going to depend primarily on the retirement savings amount. Two investors can put $200,000 in the safe bucket ($50,000 per year × 4 years). If one has $1 million in retirement assets, they’ll have an 80%/20% allocation. Another person with $5 million in retirement assets will have a 96%/4% allocation. The Level3 line in Figure 1 implies either an investor with several million in assets or a very inexpensive lifestyle.
—Thomas S. from Oregon