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Dispatches Level3 Passive Portfolio Retired Investor

Level3 Withdrawal Strategy Switches Back to Normal Mode

The Level3 withdrawal strategy is calling for retirees to withdraw from their equity holdings at the beginning of 2024.

by Charles Rotblut | January 2024

Charles Rotblut leads a class in AAII's new Essential Investing Video Course. Go to https://www.aaii.com/ves for more information and to subscribe.

As we approached the end of December 2023, the Level3 withdrawal strategy was calling for retirees to withdraw from their equity holdings. This switch to normal mode from defensive mode at the beginning of 2023 is due to the S&P 500 index trading close to its all-time high as we went to press.

The Level3 passive approach for retirement incorporates growth and defensive assets. A high allocation to growth assets like equities is maintained to allow a portfolio to grow at a rate faster than inflation. Defensive assets are those that are safe from the standpoint of a drop in actual value. Such assets include short-term Treasurys, certificates of deposit (CDs) and money market funds.

The defensive allocation is established during the four years leading up to retirement. Each year that the S&P 500 starts within 5% of its previous high, one year’s worth of expected withdrawals ($50,000 in the example here) is shifted from equity to defensive.

TABLE 1 Level3 Retirement Withdrawal Approach

A person who retired at or near the end of last year or plans to retire early this year would have skipped filling up their defensive bucket at the beginning of 2023. This is because of the last bear market. To compensate for this, they would move $25,000 (using the example here) to their defensive assets now. An additional $25,000 would be moved to defensive assets at the beginning of January 1, 2025, if the S&P 500 is at or within 5% of a record high.

Once retired, withdrawals are taken from the equity allocation if the market is within 5% of its previous high (normal mode). If the S&P 500 is more than 5% below its high, withdrawals are taken from the defensive portion (defensive mode). AAII founder James Cloonan recommended making the decision to withdraw from equity or defensive on January 1 of each year due to the wide availability of year-end data.

At press time, the S&P 500 was less than 2% below its previous record high—a level we expect will put the Level3 withdrawal strategy into normal mode on January 1, 2024. Retirees following this strategy should consider taking withdrawals from their growth assets and begin replenishing their defensive assets in 2024.

Discussion

ROBERT A from NC posted over 2 years ago:

"Defensive assets are those that are safe from the standpoint of a drop in actual value. Such assets include short-term Treasurys, certificates of deposit (CDs) and money market funds." Inflation, coupled with the low returns from such assets over the past few years, belies the "safety" of such assets.


CRAIG & NANCY B from CA posted over 2 years ago:

Defensive assets are doing better than a few months ago. For example, short treasuries are now flirting with 5% -- much better than a year ago. Although they do lose to inflation, particularly when inflation goes on a rampage, holding Defensite assets is the price an investor pays for not having to sell Equities in a down market. Similar to an insurance policy in some regards.


ROBERT A from NC posted over 2 years ago:

I don't understand the logic of the previous comment. Taking a GUARANTEED reduction in return in exchange for the POSSIBILITY of selling equities in a down market is not my idea of insurance. First of all, you also miss the opportunity for gains if the market continues upward. Second, if the market is down, I get to pick and choose what to sell. I can sell the equities that provide the most tax benefit. I can sell losers or take a lower percentage of capital gain. Selling equities in a down market is not the end of the world. I'll take 3.5% in qualified dividends any day over 5% taxed as ordinary income. Where would I come up with the capital to buy fixed-income instruments anyway? I'd have to sell my equities, eat the taxes, and then put what's left over into guaranteed laggards. No thank you!


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