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Drawing an income in retirement needs to be done tax efficiently and sustainably. Discover the elements that make up a good decumulation (draw down) plan...and whether the 4% rule still stands.
Robin Powell: One of the most important responsibilities of a financial adviser is to plan a retirement spending strategy. In financial terms, retirement is known as the decumulation, or drawdown, phase.
Garrett Harbron is an expert on retirement strategy at Vanguard Asset Management. He says it’s during this period of a client’s life that a good financial adviser really comes into their own.
Garrett Harbron: If you had to make me choose between what is more important, as far as advice goes: the accumulation phase or decumulation phase? I would say, unequivocally, the decumulation phase. If you think about all of the things that go into a successful decumulation through retirement, “How much can I spend? When do I take it? How do I take it? Which buckets do I take it out of? How do I manage my tax impact?” If you think about all of those things and all of the things you need to think about to be truly successful in a retirement spending strategy, that’s much more complicated than the accumulation phase.
RP: There’s a been a great deal of research into retirement strategy in recent years, and Vanguard is one of the companies at the forefront of what is sometimes referred to as the science of retirement.
GH: For a long time we didn’t really give a whole lot of thought to what retirement spending looked like because we didn’t really have to. Most people were covered by a DB Plan, State Pensions, Social Security, which was arguably a little bit more generous than it is today. People weren’t expected to provide for their own retirement to the extent that they are expected to now.
And, this is being compounded by the fact that the baby boomers are retiring - so we have more people retiring each year - people are living longer. The concept of a 40-year retirement 30 years ago was completely foreign. Today it’s very much a reality.
RP: Traditionally, when planning a client’s retirement spending, many advisers have relied on the so-called 4% Rule. That means the amount the client takes out of their portfolio each year is fixed at 4% of its value on retirement, with adjustments for annual inflation.
GH: There’s been a lot of talk lately about: “Is the 4% Rule dead?” And based on our research, at least in the UK, we don’t feel like it is. When we run our numbers and do our simulations for the 4% Rule and measure it against an 85% portfolio success rate, that’s over 10,000 simulations, the portfolio has money left after 30 years. 85% of the time we find that the maximum sustainable spending rate is actually 4,17%, so a little bit over the 4% mark.
RP: So, the 4% Rule is still valid. But there are alternatives which may suit you better. But bear in mind, this is a highly specialised field, and it pays to ask an adviser to explain the options to you.
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