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AAII founder James Cloonan’s Level3 withdrawal approach allows retirees to stay invested in assets that offer the greatest potential for growth in long-term wealth while satisfying current funding needs and minimizing real risk. To commemorate the month of Jim’s birthday and pay homage to the legacy of education he left us, we offer an updated example of his retirement withdrawal approach using recent market conditions in Table 1.

The Level3 withdrawal approach incorporates two types of assets. The first is equities: A high allocation to them is maintained to allow a portfolio to grow at a rate faster than inflation. The second is defensive: Defensive assets are those that are safe from the standpoint of a drop in actual value. Such assets include short-term Treasuries, certificates of deposit (CDs) and money market funds.

TABLE 1. Level3 Retirement Withdrawal Approach

Date	Market Condition	Amount	Location of Withdrawal/Transfer	Safe Portion
Retirement Date: January 1, 2022
Pre-Retirement Stage
1/1/2018	OK	$50,000	transfer from Equity to Defensive	$50,000
1/1/2019	DOWN	$0	wait to transfer Equity to Defensive	$50,000
1/1/2020	OK	$75,000	transfer from Equity to Defensive	$125,000
1/1/2021	OK	$75,000	transfer from Equity to Defensive	$200,000
Retirement Date: 2018 or Earlier*
Start of Retirement
1/1/2018	OK	$50,000	withdraw from Equity for expenses	$200,000
1/1/2019	DOWN	$50,000	withdraw from Defensive for expenses	$150,000
1/1/2020	OK	$50,000	withdraw from Equity for expenses	$150,000
1/1/2020	OK	$25,000	transfer from Equity to Defensive	$175,000
1/1/2021	OK	$50,000	withdraw from Equity for expenses	$175,000
1/1/2021	OK	$25,000	transfer from Equity to Defensive	$200,000
1/1/2022	OK**	$50,000	withdraw from Equity for expenses	$200,000
Those who retire between 2019 and 2021 would switch from pre-retired to retired for the appropriate years. *As of press time in mid-December 2021, the S&P 500 index was within 5% of its record high.

The defensive allocation is established during the four-year period leading up to retirement. Each year that the S&P 500 index starts within 5% of its previous high, one year’s worth of expected withdrawals ($50,000 in the example) is shifted from equity to defensive. Once retired, withdrawals are taken from the equity allocation if the market is within 5% of its previous highs. If the S&P 500 is more than 5% below its highs, withdrawals are taken from the defensive portion.

Cloonan recommended making the decision to withdraw from the equity or defensive allocation on January 1 of each year due to the wide availability of year-end data. Since 2017, the S&P 500 has only been more than 5% below its previous high at year-end once—the end of 2018. A pre-retiree would have postponed transferring dollars from equities and then made up the difference with two larger transfers to their safe bucket in 2020 and 2021. A retiree would have made withdrawals from their defensive assets at the start of 2019 and then replenished those assets in 2020 and 2021.

As we went to press, the S&P 500 was within 2.3% of its record high of 4,743.83. This is within the acceptable range for taking withdrawals from equities (or transferring from equity to defensive for those preparing for retirement). If the large-cap index were to end 2021 more than 5% below its record high, withdrawals would be taken from defensive assets. In the latter case, retirees would use the next two up years to replenish their portfolio.