Transcript:
Easan Arulanantham:
“When should I consider increasing or reducing how much I withdraw from my accounts?”
Tom Vaughan:
Yeah, that’s a good point. Because, you know, there’s all these withdrawal rules, and, you know, take out 3%, take out 4% and take out 5%. There’s all kinds of there’s a lot of articles on that, which I think is interesting. And so I mean, the one thing that’s kind of interesting, if you actually take a percent, right? let’s just say 3%, let’s say I have a million dollars, I take 3% out, that’s $30,000 a year. And so then, if my, you know, value of that account drops, so would my income drop, because I’m taking out 3%. That’s actually fairly, you know, I think that would work pretty well, at least in my experience. However, what I have seen is that people don’t do that. So, in other words, if they were taking out $30,000, they’ve now locked in a lifestyle around that income, and combined with all their other income, Social Security, and pensions, and rents and those things… And all of a sudden, the market falls, and they still want that $30,000. And that’s okay, like in these type of downturns we’re having now they’re kind of small, there’s no real problem with that. But once we get kind of a bigger downturn, that’s really rolling to the downside, you know, 2008 or 2000 downturn, those types of things, there probably should be some consideration for cutting back on that withdrawal, really, no matter what it is. Hopefully, it’s not too high, sometimes people are taking out too much to begin with. I mean, if you’re taking out 10% of the value of your accounts, there’s almost no market that that’s going to work for for very long.
So, you know, there is some, for those people, you should be cutting back no matter what the market is, but for the rest of us who are kind of taking out something, you know, somewhat reasonable. What I what I recommend, is just be, you know, able and willing to just kind of cut back a little bit in these bigger downturns. And the ideal scenario would be that you’d have some two components. Number one, the ability to cut back you know, what you’re spending a little bit and number two, is maybe some cash buffer on the side so that, you know, you could start to use that cash buffer for a while in you know, as your as your market cap, market accounts are kind of falling down some because of these big downturns. And then you know, that way you’re not pulling so much money out. So for example, if I have a kind of extreme example, but if I have a million dollar account taking out $30,000, that’s 3%. But if that account drops to $500,000, I’m still taking out $30,000, I’m now taking out 6%; makes it much harder for that account to get back to a million dollars. But if I could cut back, right, what I’m taking to maybe $15,000, still keeping it at 3%. And if I needed more money, I could get that out of some kind of cash buffer. So I think the cash buffer allows you to, you know, alleviate some of the pressure that you’re putting on some of your assets in that regard.
So it you know, there’s percentages, there’s actual dollar amounts, there’s different things that people are looking at. I’m a huge advocate of being prepared for downturns in lots of different ways, but one of which is having a lifestyle that isn’t completely fixed and locked in. So that, you know, you know, that’s why if you can pay off your mortgage, that’s awesome. And it just gives you some ability to cut back on some of your discretionary things a little bit. 2008, you know, we all kind of did that anyway. And then secondly, to make sure you have some type of a cash buffer sitting there to live off of for a while, maybe you can replenish that as the markets come back as far as that goes. But I think that’s the best way to handle these situations, as far as that goes and still stay, you know, invested. Because unfortunately, we can’t put everything in the bank, because inflation is 6.2% last month was the report, we’re not making that in the bank, you know. The only places that really seemed to do a great job of keeping up with inflation are real estate and stocks. So they have to have something out there for that purpose, unless you have tons of money. If I have $10 million, and only need $30,000 to live off of that’s a different scenario, I can have everything in the bank, probably and make that work. But most people don’t, you know, they kind of have something, you know, that they that they need to have out there. So if that’s true, than having a strategy of a flexible spending strategy, combined with some cash buffer, I think that’s the way to go.
Easan Arulanantham:
How many clients actually use a percentage of withdrawals based on assets versus kind of like a fixed amount? Would you say a majority uses a fixed amount?
Tom Vaughan:
Well, no, I’d say majority actually use a percentage for a starting point. So in other words, again, into retirement, and we say, okay, you know, what can we use? And we’ll back test this, using the Monte Carlo simulation, and figure out okay, you know, 85%-99% probability on MonteCarlo simulation, how much money can we spend? And it’s usually some percentage, you know, 2% to 5%, someplace in there, it depends on the situation. And so it usually starts off as a percentage. But again, what then happens is, it becomes like a salary. So I’m getting $30,000. And so, you know, I now I’m using that, you know, for whatever purpose that I might be, you know, spending that on, and then all of a sudden, you know, the accounts drop, and a little bit of drop, that’s not a problem, that’s normal. Like what we’re dealing with right now, don’t worry about it may affect anything, you know, probably up to 20% isn’t a really big deal. Usually, that works its way out. But just being prepared, you know, to be able to kind of pull that back. So yeah, I’d say it starts off as a percentage, oftentimes, although the way we do it is a little bit differently, we solve for how much can be spent to meet the required, in our opinion, success meter in, you know, using the Monte Carlo simulation, and I don’t really want anybody to be below 85%. And that’s actually, you know, pretty good number altogether. But obviously, it’s even better to be at 90, 95, 99% probability of success with the amount of money that you’re spending. So just, you know, the whole objective is to make sure that you don’t get deep into your life, and find out that you don’t have enough money, because it’s really hard to make adjustments at that time, at that point in time.