What does
this chart mean?
this chart mean?
Results based on rolling periods using monthly-frequency historical data.
* Volatility (standard deviation) of annual portfolio returns.
When this box is checked, withdrawals are grown at the rate of inflation that prevailed in each historical month over which the chosen strategy is back-tested. In this way, the purchasing power of withdrawals remains constant through retirement. When unchecked, withdrawals are not adjusted.
The Big Picture is grounded in the methodology used by William Bengen in his seminal 1990s research. Namely, it assumes constant portfolio distributions throughout retirement.
Some investors wish to project future changes to spending, either in anticipation of evolving needs, or in line with one of the various “rules-based” strategies.
There are a couple of challenges with this approach:
1. Research tells us that portfolio performance in the first few years of retirement is critical to long-term outcomes, while performance in subsequent years is comparatively inconsequential. Modeling changes to spending that are decades into the future, when we don’t know what will happen to the portfolio in those first few critical years, is of relatively little value.
2. Spending rules can be unrealistic for some retirees (e.g. some rules would call for massive reductions in spending), in addition to complicating the conversation and creating “options paralysis”.
With these limitations in mind, we reaffirm Bengen’s original fixed spending assumption in computing safe withdrawal rates, and suggest the following:
Run a simulation now, using the software’s constant-spending assumption, to get baseline guidance. Then, if your portfolio appreciates or depreciates significantly, or if your spending needs change, simply revisit the Big Picture with inputs that reflect this new reality.
In our view, this approach is more adaptive than sticking steadfastly to any plan committed to under past circumstances.
Chesme Capital Management (“Chesme”) is a Registered Investment Advisor ("RIA") registered with the SEC. Registration as an investment adviser does not imply a certain level of skill or training, and the content of this communication has not been approved or verified by the SEC or by any state securities authority. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. For results specific to your portfolio and/or circumstances, please contact a Chesme Capital Management Investment Adviser. Please review the FAQs for a description of the criteria and methodology used. Results may vary with each use and over time. The tool generates outcomes that are hypothetical in nature and have been created with the benefit of hindsight and it may be difficult if not impossible to account for all the factors that might have affected a manager’s decision-making process. The data set shown may not be indicative of present or future market conditions and may not have reflected the expenses associated with the management of an actual portfolio.