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Withdrawal Strategies: Articles and more
bob90245 02-12-2006, 12:44 AM | Post #167544 | 
3  

A few months ago, I started CONVERSATION 2409. Since then, there have been a few additions. So for the sake of continuity and completeness, I am reposting much of the previous material here along with those additions. If much of this looks familiar, I apologize.

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In this introduction, I will summarize the four categories of withdrawal strategies. I will present them in order of capital required. This particular discussion excludes external sources of income such as social security and pension income. Also, in this discussion, I will assume that a 65 year old retiree will have a 30-year lifespan.

Constant Percentage

In this withdrawal method, the retiree withdraws a fixed percentage from the nest egg. During bear markets, the annual withdrawal will be less. Conversely, during bull markets, the annual withdrawal will be more. This method would only be suitable for retirees who can handle fluctuating income. The starting nest egg should be at least 20 times the first year's withdrawal.

Constant Dollar Amount

In this withdrawal method, the retiree withdraws a fixed dollar amount from the nest egg. A small additional amount (usually 3%) can be withdrawn each year to maintain inflation-adjusted purchasing power. This is the most common withdrawal method. Most of the articles discussing withdrawal strategies deal with this method. The starting nest egg should be at least 25 times the first year's withdrawal.

Dividend Only

In this withdrawal method, the retiree abandons fixed income securities and instead owns a collection of dividend paying stocks. The retiree relies on shrewd stock selection and the ability of his stocks to pay a steady and ever increasing annual dividend. In contrast with the "Constant Percentage" and "Constant Dollar" methods, the "Dividend Only" retiree doesn't concern himself with fluctuations of his holdings. In addition, the "Dividend Only" retiree doesn't plan to trade any of his holdings. The starting nest egg should be at least 33 times the first year's withdrawal. An example of this method would be an ETF of dividend stocks like DVY. The current yield is around 3%. Click HERE.

A variation of this method with bonds added to the portfolio is discussed in post #9 below.

Fixed Income Only

I doubt many readers are capable of employing this withdrawal method. The starting nest egg should be at least 35 to 40 times the first year's withdrawal. If you are using this method, you are in a most enviable position of not having to rely on stocks (and their accompanying volatility) to maintain your lifestyle.


bob90245

Originally posted in thread: 2572
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