Where Should You Pull Income in the First Year of Retirement?

Questions answered: Which approach is best for maximizing your results? What are the rules in the guardrails approach? Why don’t we just put all our money into stocks?

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Key Takeaways:

• There are different approaches to create income in retirement.
  • Some people take a dividend strategy, others take a total return strategy, or a guardrails strategy, to name a few.
    • Choose the approach that makes the most sense for you and your situation.
  • Episode 27 deals with the guardrails approach in more detail.
• Why we don’t put all our money in stocks.
  • Cash holdings have an interest rate of maximum 0.5%.
  • The stock market has an interest rate of around 10%.
    • Stocks might add 10% per year on average, but they’re inconsistent.
      • There are years where the stock is lower, and you don’t want to sell stocks when they’re low.
        • During these years, you’ll be using your emergency/cash funds.
• The guardrails approach:
  • You want to ensure that you have enough money/income from your portfolio.
  • You want to maximise the amount of income you can live on from your portfolio while minimising risk and overspending.
  • You want to make sure your portfolio income keeps up with inflation.
    • You do this by implementing rules around how you pull funds from your portfolio.
      • The portfolio management rule:
        • When the asset class has a positive return exceeding its target allocation, excess allocation is sold and invested in cash to meet future withdrawal requirements.
        • The order of priorities:
          • The first place to pull income is from excess stock.
          • If there’s no excess stock, pull income from excess in fixed income.
          • If there’s no excess allocation, you can pull income from cash.
          • The fourth place to pull income is from withdrawals from remaining fixed income assets.
          • The fifth place to pull income from the remaining equity assets.
        • No withdrawals are taken from equities with negative returns if cash assets are sufficient to fund the withdrawal.
• You could be living on cash first as part of your tax strategy.
  • This is separate from your investment strategy.
  • Living on cash when you first retire lowers your taxable income.
    • This allows you to do Roth conversions at lower tax rates.
• The inflation rule:
  • This determines the size of the annual increase in your portfolio withdrawal.
  • You want to increase withdrawals with inflation.
    • Inflation adjustments are capped at 6% per year.
• The withdrawal rule:
  • Withdrawals increase year-to-year in accordance with the inflation rule.
    • Except – there’s no increase following a year when a portfolio’s return is negative, and the withdrawal rate would be greater than the initial withdrawal rate.
• The capital preservation rule:
  • This is used to get retirees back on track in originally failed scenarios.
  • This rule is implemented when the current year’s withdrawal rate has risen 20% above the initial withdrawal rate.
• The prosperity rule:
  • If your initial withdrawal rate falls more than 20% below your initial withdrawal rate, you can increase your withdrawal by 10%.
• It’s difficult to know exactly where you’ll pull money every year.
  • Implementing this approach gives you the freedom from having to stress upfront.

Episode Timeline:

[04:13] The approaches to retirement income.

[05:36] Why we don’t put all our money in stocks every year.

[09:03] Deep dive into the guardrails approach.

[09:57] The portfolio management rule.

[19:10] The inflation rule.

[19:57] The withdrawal rule.

[22:36] The capital preservation rule.

[24:29] The prosperity rule.

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