Investment tips: You must review your retirement distribution

August 13, 2013 

A very popular topic today is the sustainable withdrawal rate.

Thirty years ago, certified financial planner William Bengen published the so-called 4 percent rule. Based on examination of rolling 30-year retirement periods from 1926, utilizing traditional U.S. large company stocks and government bonds, he determined that a retiree could successfully distribute 4 percent of their portfolio per year without running out of money.

Given today's low interest rate environment (A 50/50 U.S. stock/bond portfolio in 2011 yielded 2.8 percent versus a 1982 yield of 10.6 percent), many academic studies are revisiting the safe withdrawal rate.

In reviewing several studies, it was determined that a 4 percent distribution had a 57 percent chance of failing and that a 3 percent distribution was the new sustainable rate.

The studies further indicate that a 4 percent

distribution could be achieved but would require two strategic changes to the assumptions:

Portfolio management: Greater diversification beyond U.S. large company stocks and government bonds.

Portfolio distributions: Yield must be downplayed in favor of a total return approach to income.

Retirement planning is not a one-size-fits-all process. A 4 percent rule can have broad application, but to fully understand your personal needs you must address your situation and what makes you unique.

My financial philosophy focuses on seven habits to financial freedom. One of the seven habits is to begin with the end in mind and put together a list of priorities. Getting your financial house in order will go a long way in helping you understand your strengths, weaknesses, opportunities and threats.

A baseline goal is maintaining your current lifestyle for life without exhausting financial assets. Considerations for life expectancy, disability, incapacity, entitlements and required reserves are unique to each family.

A common mistake is not spending the time accounting for secondary goals and creating a range of ideal and acceptable targets. Targets allow you to better monitor progress and ensure you are not taking too much risk or unnecessarily sacrificing lifestyle. There are many tools available online that can help you better address your priorities and goals and create a highly tailored plan of action.

A further problem with basing retirement distributions on a rule of thumb is that it doesn't account for changes your life may bring. As the saying goes, the only constant is change. Plans and circumstances will vary and have an impact on portfolio needs.

Flexibility in planning is key to being able to adapt to circumstances. Flexibility requires that you monitor and track your progress regularly to ensure that you make minor adjustments as needed to stay on track. Implementing good habits and processes will instill confidence and insulate you from making emotionally based decisions.

Complex decisions require greater time and attention to details. A good retirement plan will encompass the wisdom that comes through sustainable withdrawal scenarios such as the benefits of greater diversification and total return. It will also consider the individual, their goals, and their unique characteristics. It requires a process designed for flexibility and regular adjustments.

Consider the steps necessary to creating a garden. The foundation needs to be prepared by cultivating the soil. One has to consider multiple factors including the region, sunlight and probable weather patterns.

There are tradeoffs between the higher maintenance, more colorful flowers and lower maintenance alternatives. Once planted, flowers have a way of growing in unforeseen ways. The garden must then be maintained through pruning, weeding and seeding. For some, the enhanced experiences and aesthetics are well worth the efforts.

As they say, don't forget to smell the roses. Something as important as a 30-year retirement should be given the same love and attention.

Gardner Sherrill, MBA, CFP helps families, independent women, and entrepreneurs plan for a successful retirement without unnecessary risk or sacrifice. To learn more visit

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