Managing Money During Retirement
with
Defined Withdrawals
 A strategy for steady, dependable, and long-term investment income.
 
   
 
Defined Withdrawals Strategy - FAQs
1.    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 to be 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 cool head.

2.    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.

3.    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.

4.    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 dependable income.

We 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.

5.    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.

6.   Do I need to wait until the end of the stock holding period before selling stocks?

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 Out strategy.

7.   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. 

 

Creating an income ladder using ordinary bank certificates of deposit is not difficult.  In fact the free online calculator at IncomeLadders.com makes it easy.  CLICK HERE  

   
Free Book Download
This 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, etc. CLICK HERE

    
Free Investment Income Simulator
In 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 HERE

   
A Nightmare On Wall Street
We recommend viewing this free presentation before using the Investment Income Simulator. CLICK HERE

     

Retirement Income Software
The unique ISG software is designed specifically for developing sophisticated retirement income plans using the Defined Withdrawals strategy. CLICK HERE 

     

 
 
   
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