Financial advisors face two key questions when it comes to retirement planning: how much can clients afford to withdraw from their portfolios; and how should clients adjust their spending patterns in response to changes in portfolio values?

The rule of thumb suggests that retirees should select a 4% withdrawal rate at retirement – adjusted for inflation every year thereafter – regardless of portfolio performance, expected mortality or your client’s changing circumstances. But a growing body of research suggests that updating the client’s withdrawal strategy on a regular basis improves outcomes significantly.

However, you may be hesitant to implement a more active withdrawal strategy, given the sometimes complex software, tools or processes that are needed. The solution is to narrow the focus, writes David Blanchett, head of retirement research, investment management, for Chicago-based Morningstar Inc., in a recent Journal of Financial Planning paper entitled “Simple Formulas to Implement Complex Withdrawal Strategies.”

Blanchett suggests advisors should concentrate on two formulas to simplify the optimal withdrawal amount calculation.

The first equation, which Blanchett labels a “dynamic” formula, works for periods of 15 years or longer and can be used to determine the optimal withdrawal rate for each year of retirement using just four variables. Those inputs include asset allocation, the remaining retirement time horizon, the targeted probability of success and an alpha factor that reflects portfolio over/underperformance relative to any built-in capital market expectations.

For example, if you believe the future returns for a 60% equities portfolio will be 2% lower than the assumed returns for most Monte Carlo simulations, the assumed alpha would be minus 2%.

To assist with customized calculations, Blanchett has created a detailed Excel spreadsheet (www.davidmblanchett.com/tools) that enables you to develop your own scenarios.

In testing this dynamic withdrawal model, Blanchett found that the optimal retirement horizon is the client’s median remaining life expectancy plus two years – and the optimal target probability of success is 80%.

The second formula is based on the U.S. Internal Revenue Service’s (IRS) required minimum distribution rules (similar to those governing registered retirement income funds in Canada), which force an investor to begin taking a minimum amount of money out of his or her tax-deferred savings plan at age 70.5.

This approach works better for periods of less than 15 years, Blanchett maintains. This method’s principal attraction is that it requires only the client’s retirement period as the single input because the IRS stipulates withdrawal percentages based on life expectancy tables.

The result is that actual spending responds to fluctuations in the value of your client’s assets because the dollar amount of the withdrawal is based on the portfolio’s current market value. In other words, your clients effectively cut back a bit when returns are poor.

Both approaches should appeal to clients who are flexible when it comes to sustainable spending and interested in what’s realistic at each point in time.

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