August 3

Protecting retirement income through proactive planning


Published in the Bradenton Herald 08/04/2020

Retirement Income planning is like running in an egg and spoon race.  Run too fast, and you risk dropping your egg, run too slow, and you lose the game.  At the same time you are working your way down the course; you have pundits screaming conflicting instructions at you, and every so often, the weather shifts to pouring rain and possibly even lightning.  An agreed-upon set of instructions can go a long way to helping you filter out the noise and make progress towards your recurring income needs. 

Many planners have adopted an investment policy statement (IPS) as a set of guiding principles for decision making around asset allocation, rebalancing, and discipline in the face of market turbulence.  The IPS is an excellent tool in helping manage a portfolio’s vertical risk – the risk of market volatility and how low the markets and your savings might drop.

As one moves from saving for retirement to living in retirement, you will have more planning opportunities and more planning threats than before you left the workforce.  Retirement brings with it a horizontal risk – the risk of sustaining an income throughout a market drop before you are forced to sell equities at depressed prices.   A Withdrawal Policy Statement (WPS) is a similar set of guiding principles around retirement portfolio withdrawals that can help to address horizontal risks.

A good WPS isn’t a financial plan or a risk tolerance questionnaire.  It’s a set of guiding principles around how to manage a portfolio’s withdrawal needs in accordance with an income objective.  The WPS should be broad enough to encompass unexpected events (Covid-19 maybe) as they reveal themselves and detailed enough, so you know always know your next steps to take when markets adapt.

The WPS should address the withdrawal income goals, including the expected length of retirement, anticipated increases in the cost of living, tax efficiency, and income stability.  The next step would be to set an initial withdrawal rate as a percentage of the portfolio.  There are different methodologies here, but you can start with the 4% rule as a baseline before considering more advanced dynamic distribution rules.  Spending rules are needed to determine annual changes to your withdrawal rate.  If using the 4% rule, you can simply increase spending by the Consumer Price Index (CPI).  Lastly, add portfolio management rules to determine allocation, location, rebalancing, and sourcing of income.  

Compared to the scary questions of “what do we do now” or “do I still have enough,” a WPS can give you confidence that you have a rules-based approach to dealing with uncertainty.

The WPS directs you to only acting when required – you have clear targets around what is nothing to worry about versus what is a decline that’s deep enough to be actionable.  Your spending and portfolio rules will dictate how to adapt and weather the storm. 

Jonathan Guyton, one of the early proponents of using a WPS stated, “Benefits abound from the use of planning policies:  they lay out a framework for evaluating tradeoffs, proactively establish expectations, create a touchstone of stability for clients when emotions and markets are roiled, and guide planners in decision-making during the most turbulent of times.”

The key takeaway:  A withdrawal policy statement ensures you have a plan for dealing with market declines.  Expect market volatility and protect your vertical and horizontal risks by having policies in place to absorb and deflect costly reactionary mistakes.  Let the pundits and market timers waste their emotional time and energy trying to predict market movements while you confidently move your egg and spoon towards the finish line. 

Gardner Sherrill, CFP, MBA, is a certified financial planner with Sherrill Wealth Management. To learn more, visit sherrillwealth.com, a Bradenton wealth management firm specialized on living in retirement.

The opinions expressed in this material are not intended to provide specific advice or recommendations for any individual.

Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.


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About the author

Gardner is a CERTIFIED FINANCIAL PLANNER and principal of Sherrill Wealth Management in Bradenton, Florida. He has spent 20+ years in the wealth management field helping families negotiate the various obstacles and opportunities that retirement provides them. Read More

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