Author: Mike Holman

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Recently I wrote about the 4% withdrawal rule which is a guide for safe portfolio withdrawals in retirement. To reiterate, the basic rule is that you withdraw 4% of the portfolio in the first year of retirement and then every year afterwards you withdraw the amount you took out the previous year plus inflation.

Bill Bengen who was the “creator” of the 4% rule no longer uses it in his financial advisory practice. The problem with the 4% rule (actually the 4.2%) rule is that while it does accomplish the goal of ensuring that an investor who follows the rule will not likely outlive their money – if the portfolio performance is better than expected, then the calculated withdrawals will be too conservative and might end up almost guaranteeing that the investor dies (at an old age) with a large amount of money remaining which might not be what was intended.

Bengen’s new strategy is as follows:

Flexibility is factored into Bengen’s revised approach, which permits withdrawals to fluctuate within guidelines. His “floor-and-ceiling strategy” suggests that an initial withdrawal rate of 5.16% would be appropriate if a retiree pares back subsequent withdrawals by as much as 10% of the initial withdrawal during hard times (the floor). On the other hand, a retiree could withdraw extra cash equaling up to 25% of the first-year withdrawal (the ceiling) when the market is strong. The starting rate would vary depending on how much volatility a retiree could stomach. (More details on his research are at billbengen.com.)

He does add that there is no “absolute solution” and that “In general, I think you are better off planning conservatively initially because you can always make adjustments later.”

William J. Bernstein who is a big fan of the 4% rule, also talks about withdrawing a fixed percentage of the portfolio each year instead of a fixed amount based on the first year withdrawal plus inflation. This is the ultimate in flexible withdrawals but the problem as he notes is that the withdrawal amounts can vary by a large amount each year due to market fluctuations. As Bernstein aptly puts it “Keep a few cans of Alpo in the cupboard if you decide to go this route.”

I’ve always been a fan of being flexible with withdrawal rates so I like the idea that maybe the rigid 4% rule is a bit too rigid. I’m thinking of having a retirement plan where I start with a withdrawal rate of 5% and be flexible depending on the markets. One way to be able to do this is to have a fair bit of “extra” money built into your retirement scenario. For example if you are planning to retire with $50k per year (in today’s dollars) but $15k of that is for traveling and “extra spending” then if the markets tank, you could potentially cut your withdrawals down to $35k and maintain your basic standard of living. On the flip side, if the markets have a sustained rally in the beginning of your retirement then you can probably spend a bit extra. I think the key to handle that situation is to spend the bonus money on one time only costs such as vacations, renos, gifts etc. If you start buying more expensive houses or cars then those items will leave you with higher costs for a long time.

This post is part of a group project on will writing and estate planning. Other blogs participating are: Thicken My Wallet, Million Dollar Journey, Where Does All My Money Go, The Financial Blogger and Canadian Capitalist.

…was finally completed recently – the “will” at least, not sure about the “testament” thingy. 🙂 We had started this effort a year and a half ago but when the lawyer had one final question for us to answer, we put it on the back burner and didn’t get around to it until now. Kudos to my wife for putting in the final push to get this done!

Why do you need a will?

The main motivation for us was our kids. We wanted to ensure that if something happened to both of us, that the kids would be looked after by someone that we could choose rather than someone a court would appoint. Another reason was that if one of us passed away, then we wanted to make it easier for the survivor to carry on and not have to pay extra legal fees to get things settled.

How much does a will cost?

We paid $350 to get a will done with our lawyer (who is in Toronto, Canada) – he said he normally charges $400 but we have done a lot of business with him so he gave us a discount (or so he says).

How much work is involved?

I would suggest there are a few hours involved because you have to decide a lot of things like:

• Who will look after your kids (and a backup).
• Who will be the executor of the will (and backup).
• Who will have power of attorney and decision-making ability in the case where one or both spouses becomes incapacitated (ie decide to pull the plug) (and a backup).
• Who inherits your possessions in the case of one or more deaths in the family (this could include everyone dying).

There are other situations to be covered which I won’t list since I don’t want this post to be the reference point for a home-made will.

It is also important to let other people know of your intentions – especially if you are designating them to look after your kids. Not everyone will be interested!

How do I decide who will look after my kids?

Good question! I think the best way to approach this is to figure out which friends or relatives are most likely to raise them in a way that you approve (which doesn’t have to be the same way as you).

Things we thought about:

• Family unit – both couples we chose have kids about the same age as our kids. We felt that it would be less of a burden for someone to add a couple more kids rather than to add kids to a family that either doesn’t have kids or the kids are a lot older.
• Values – you can’t rule from the grave so don’t try. Don’t give the potential guardians four million rules and instructions, just pick someone you trust and respect – they will do the right thing.

Make a list of financial accounts

It’s important to make a list of all your financial accounts and assets so that the survivor or executor doesn’t miss anything and doesn’t have to spend hours and hours going through all your old paperwork to find various accounts. We made a list of all our financial accounts like credit cards, bank accounts, investment accounts etc and will give a copy to the executor. We have a copy here at our house for the survivor in case one of us passes away. Ok we haven’t quite finished this last step but it will happen!

What about just writing my own will or use a “do it home” kit?

I asked my lawyer this very question and he said that although it’s not the worst strategy – the problem is that if there are any errors or omissions or if things change after the will was written then it won’t stand up in court as well as a proper will. I think that if you don’t have kids and maybe don’t have a ton of money then doing it yourself is probably a good option but keep in mind that you are not saving a lot of money so hiring a lawyer shouldn’t be a last resort.

Check out the other posts in this series:

Thicken My Wallet wrote about “Top 5 myths about wills“.

Million Dollar Journey details “Why you need a will and the basics of estate planning“.

The Financial Blogger has “Common mistakes on a will“.

Canadian Capitalist came up with “A guide to getting your will done through a lawyer“.

Where Does All My Money Go provides some “Benefits of a professional executor“.