Withdrawals Strategy - FAQs
|| How does the Defined Withdrawals strategy work?
The portfolio is divided
into two portions. The first portion is invested in an income ladder that
provides guaranteed income for a pre-determined number of years. The
second portion is invested in diversified stocks. Eventually stocks
are sold to extend the income ladder, but the income ladder allows stocks
held for the long-term when necessary. It is the income certainty of the
first portion that allows an investor to manage the second portion with a
|| What is an Income Ladder?
An income ladder is created by purchasing a series of fixed-rate
investments (or fixed-income investments) with staggered maturity dates such that the combination of
interest and matured principal provide the desired income. The
concept is similar to that of a traditional Bond Ladder except
that when investments mature, they are used to provide income rather
than to purchase more bonds. When the fixed-rate investments are
insured or guaranteed, such as with bank CDs and US Treasuries, an income
ladder is one of the best ways to achieve a reliable stream
of investment income.
|| How does this strategy differ from Modern Portfolio Theory?
Modern Portfolio Theory
provides an allocation of assets based on a client's risk tolerance.
This is an appropriate approach prior to retirement. But Modern Portfolio
Theory does not provide a plan for
withdrawing income. The
Defined Withdrawals strategy
fills this gap and provides an allocation of assets that is specifically
designed for maintaining
steady and dependable investment income.
|| What about Monte Carlo analysis?
When implemented properly, Monte Carlo analysis can provide some insight
into the range of possible outcomes for a Systematic Withdrawals
strategy. People often debate the advantages and disadvantages of Monte
Carlo analysis. But the real question is not whether Monte Carlo is a good
analysis tool. The real question is whether Systematic Withdrawals is a
good strategy! We believe that Systematic Withdrawal strategies are unpredictable
by nature and therefore not well suited for providing steady and
do use a Monte Carlo algorithm in our free Investment Income Simulator. But
this simulation tool is unique in that it does not assume a Systematic Withdrawals strategy. It lets
you decide when to sell stocks.
How long should stock holding periods be?
This is a balance of risk
and reward. Longer stock holding periods will require a longer
income ladder and therefore a more conservative allocation. Shorter
stock holding periods will require a shorter income ladder and therefore
allow a more aggressive allocation. One of the advantages of the
Defined Withdrawals strategy is that the asset allocation is driven by a
quantitative measure of risk, for example one can easily understand the
difference between 10 years of guaranteed income vs. 5 years of guaranteed
income. This is not the case with traditional qualitative measures
of risk tolerance. We prefer stock holding periods in
the range of 8 to 12 years because these intervals have typically provided
opportune times to sell.
|| Do I need to wait until the end of the stock holding period before selling
No, this is probably the most common misunderstanding about the
Defined Withdrawals strategy. The reason for the stock holding periods is not necessarily to hold stocks to
the very end---but
rather to give yourself some time to pick favorable selling
opportunities. Plan benchmarks and stock trend-lines can help you
identify favorable selling opportunities. In most cases you will not want to wait until the
end of a stock holding period before selling stocks. As we like to say...Defined Withdrawals is not a Buy and Hold
strategy for stocks, it's a
Buy and Hold
|| Why does the ISG software work with before-tax income?
If you ask people how much income they need, they will almost always
cite a before-tax value. Most people relate to before-tax income better
than they relate to after-tax income, and they actually have a better
understanding of their income needs on a before-tax basis. Few people live
their lives according to a well-defined and known after-tax budget.
We recommend investing on a tax-deferred basis so
that taxes are only paid on current annual income. The book that
accompanies the ISG software includes a number of examples to demonstrate how to handle various
tax situations. For complex situations we highly recommend seeking
competent professional assistance.
an income ladder using ordinary bank certificates of
deposit is not difficult. In fact the free
online calculator at IncomeLadders.com makes it easy.
book explains how to use the ISG
software, but it is much more than a software
manual. It is a comprehensive guide to managing
investment and retirement income. Learn about different investment income strategies, dollar-price
erosion, income ladders, the new role that
diversification plays when investing for income, the important
difference between investing in bonds vs. bond funds, trend-line analysis,
Investment Income Simulator
real life there are no do-overs, but with the Investment Income Simulator you can practice managing
investments for income. If you run out of money,
click the repeat button and try a new strategy! CLICK
Nightmare On Wall Street
recommend viewing this free presentation before using
the Investment Income Simulator.
is designed specifically for developing sophisticated
retirement income plans using the Defined Withdrawals