PTBOCanada Featured Post: Retirement Income Strategies with Matthews + Associates

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Matthews + Associates addresses income strategies for dealing with risks related to your retirement, including safe withdrawal rates, ratcheting strategies, dynamic spending and bucket strategies. It is not about making the claim that one is any better than another, it is about making sure you're aware of the options.

Safe Withdrawal Rates

What It Is: The most common type of strategy. It’s most often based on a projection with a conservative rate of return to let you know if you're going to run out of money, depending on how long it is projected that you’re going to live.

Why It Matters: What we mean by a safe withdrawal rate is the percentage of your portfolio value. For example, to keep it simple, if you have a million-dollar portfolio and you're going to use a 4% initial withdrawal rate, that would be $40,000 per year. In the case of $40,000, you could increase that by the amount of inflation each year. By the end of a 30-year retirement, you should not have run out of money based on history (assuming a properly allocated portfolio).

Ratcheting Strategy

What It Is: Like the safe withdrawal rates strategy, it is very conservative to make sure you never run out of money but has some rules in place.

Why It Matters: When you know that your portfolio has performed well, you can ratchet up spending. From a high level, the framework that this gives you is, if your portfolio gets 50% larger than where you started when you retired, you can go ahead and increase your spending by 10%. Every three years you will check in to see if you're still above that 50% buffer. If you are, you can give yourself another 10% raise, and continue to do so if you can keep the buffer there.

Conversely, if markets go down and your portfolio drops, you will lose that buffer. In this situation, you will have to stop giving yourself raises. The idea here is, before that happens, to make sure that you’ll never have to reduce your spending. The benefit of the ratcheting strategy is that it gives you the option to spend a little bit more once you know you’re in a safe zone.

Dynamic Spending (e.g. Guardrails)

What It Is: Also known as a variable spending strategy. The idea is to set yourself up in a way that allows you to spend a little more in the early years. Most people have a higher initial withdrawal rate in the early years of retirement when they are going to spend more. This is because the early years of retirement usually tend to be more active. These dynamic spending strategies allow you to take more now but with the caveat of having a plan to dial back your spending if needed. This is what makes it like the ratcheting system. The dynamic spending strategy adapts to good and bad markets – allowing you to maximize spending.

Why It Matters: This is one of the most popular and frequently employed strategies when thinking about retirement income. If we think about this as an analogy, think of the guardrails on a highway. The only goal of driving down the highway is to make sure you don't end up in the ditch and the guardrails on both sides of the highway are there to keep you safely on the road.

We can think about driving down the highway between the guardrails as being in the safe zone for how much you can take out of your portfolio each year. If you stay between the two guardrails, you will not run out of money. For example, you will start with a little bit higher initial withdrawal rate. Let’s say it's 5% instead of that safe withdrawal rate of 4% we talked about, and then monitor spending over time. The lower guardrail is kept at 4% and the upper guardrail at 6%.

Bucket Strategy

What It Is: There are several different types of bucket strategies.

Why It Matters: The bucket strategy that we’ll talk about here is really thinking of your time horizon for retirement and three different kinds of buckets.

Bucket #1 is going to be your very short-term spending. In this bucket, you're going to have things like cash and some low-risk bonds. There might be enough there to provide up to five years of retirement income spending.

Bucket #2 is where you're going to withdraw from your portfolio over the next five years, and for say five to ten years, you might have something that's more like balanced mutual funds. Something where you have a combination of low and medium-risk type investments.

Bucket #3 is your long-term bucket. Before touching this money there will be lots of time for markets to recover from any recessions. This bucket will generally be a diversified portfolio of global companies/stocks.

The buckets are designed to consider the time horizon. They are less volatile in the short term, low-medium risk growth in the mid-term, and all growth in the long term.

For more information, download our guide to the top 5 retirement risks.

Building to retirement is a project; and like any great project, it begins with a good plan. In our podcast “Your Retirement Planning Simplified”, available on Apple Podcasts, Spotify, Stitcher, Google Podcasts, or by RSS, we answer those burning questions about retirement. We help you learn how to optimize your investments, reduce your retirement risks, lower taxes and build true wealth, in an easy and accessible way.

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