Money Guy Show: "Creating a Retirement Withdrawal Plan"

Hosts: Brian Preston (with Bo Hanson in spirit)
Date: February 25, 2008
Summary Prepared By: Money Guy Show Podcast Summarizer

Overview of the Episode's Main Theme

This episode is devoted to the essential topic of building a retirement withdrawal plan. Host Brian Preston walks listeners through practical, research-backed strategies for determining how much you can safely withdraw from your retirement portfolio. The episode addresses both retirees and aspiring retirees (including family stewards advising others), covering the "5% Rule", the research underpinning safe withdrawal rates, and the nuances of asset allocation as you approach and enjoy retirement. Brian also responds to a thoughtful listener email about portfolio diversification and asset allocation thresholds.

Key Discussion Points & Insights

1. Why This Topic Matters to Everyone

• Preston emphasizes from the outset that retirement planning is relevant even to younger listeners, both for their future and for advising friends and family.
• “We are all going to retire at some point in our life... and as we've got this aging population, all the baby boomers getting close to retirement, you're going to have people asking [these questions].”
  — Brian Preston, 00:19

2. The "Quick and Dirty" Retirement Formula: The 5% Rule

• Calculating Your Retirement Number:

  • Decide how much you want annually in retirement (in today's dollars).
  • Divide that number by 0.05 (or 5%) to get the amount you need to save.
  • Example: Want $50,000/year? $50,000 ÷ 0.05 = $1,000,000 needed.

• This rule is simple and offers conservative assurance, aiming to make your money last at least 30 years.

• "This is so simple, it's really crazy... you can take how much money you're going to need a year to live off of and then divide it by 5%.”
  — Brian Preston, 07:08

• Assumptions & Caveats:

  • Assumes average market cycles with no major bear market or depression events.
  • Based on a diversified, moderate-risk portfolio.

3. Scientific Backing: William Bengen’s Research

• Preston references research by CFP William Bengen, a pivotal figure in identifying safe withdrawal rates.

• Key Finding:

  • With a two-asset-class portfolio (65% large-cap stocks, 35% intermediate-term government bonds, rebalanced annually), a 4.15% withdrawal rate is sustainable for 30 years.
    — Brian Preston, 13:37

• Impact of Diversification:

  • Adding a third asset class (e.g., small-cap stocks) raises the sustainable withdrawal rate slightly, demonstrating the benefits of diversification.

4. More Withdrawal Rates & Portfolio Longevity

• The shorter your retirement timeframe, the more you can safely withdraw (e.g., 8.9% over a 10-year horizon).
• Increasing your withdrawal rate above calculated safe rates sharply raises the risk of running out of money.
  • "An increase of 1 percentage point above the calculated safe withdrawal rate... reduces the probability that your portfolio will last 30 years by 15 to 20%.”
    — Brian Preston, 18:38
  • 4.42% withdrawal rate: 100% historical success rate (balanced portfolio: 40% large-cap, 20% small-cap, 40% government bonds)
  • 5% withdrawal rate: 94% success rate
  • 6% withdrawal rate: 71% success rate
  • 6.5% withdrawal rate: 58% success rate

5. The Myth of Over-Rebalancing (a.k.a. Lazy Investing)

• Less frequent rebalancing (e.g., every 6 years) can improve your withdrawal rate slightly but increases risk because you may end up with more equity exposure.
• "Investors can marginally increase their initial withdrawal rates by changing the frequency that they rebalance... according to Bengen's research, investors could rebalance every 75 months and improve the initial withdrawal rate to 4.65%.”
  — Brian Preston, 21:03
• Ultimately, Preston recommends annual rebalancing as a prudent middle ground.

6. Listener Email: Small Allocations in Diversification

• Listener Mike (Colorado) asks: Is it worth having holdings as small as 2–5% of your portfolio?
• Preston responds that for smaller portfolios (under $300,000), don’t worry too much about slicing your allocation so finely. Focus on savings first.
• “When you’re in the accumulation stage... you just need to go buy some of the good funds out there... and just get to work on saving. Savings should be your primary goal.”
  — Brian Preston, 24:02
• For larger portfolios (over $300,000), small allocations (even just $15k–$20k in a fund) can make sense to maximize diversification and returns—especially when managing volatility in uncertain markets.
• Good asset allocation helps, but don’t let it distract you from the importance of continuous savings until your portfolio is substantial.

Notable Quotes & Memorable Moments

• “I’ve got a real quick and dirty method for you to calculate if you’ve saved enough money... It’s called the 5% rule.” — Brian Preston, 07:08
• “If you go up to 5% [withdrawal rate]... you have a 94% likelihood of success. You go up to 6%, now you only have a 71% level.” — Brian Preston, 20:10
• “Lazy investing is good investing... not trying to buy and sell at all times to chase the hot dot and rebalance too much because you’re probably outsmarting yourself.” — Brian Preston, 21:36
• “Savings should be your primary goal. When you’re just trying to accumulate enough assets so that when you do start to get that 10% rate, it makes a huge substantial difference in your financial life.” — Brian Preston, 24:12

Important Timestamps

• 00:15 – Introduction to the topic & its relevance
• 07:08 – The "5% Rule" explained
• 13:37 – William Bengen’s research: withdrawal rates and asset allocation
• 18:38 – Risks of increasing your withdrawal rate
• 20:10 – Portfolio withdrawal rate success percentages
• 21:03 – Lazy (infrequent) investing and rebalancing explained
• 22:50 – Listener email about asset allocation percentages
• 24:02 – Advice for young/small-portfolio investors
• 25:26 – (Show ends prior to advertisements and disclaimers)

Final Takeaways

• Start with your annual income need, divide by 0.05 (5%) for a conservative nest egg target.
• Withdrawal rates above 4–5% greatly raise your chances of running out of money.
• Diversification improves your odds; overcomplicating is unnecessary for most accumulating investors.
• Focused savings effort outweighs fine-tuned allocation for those with smaller portfolios.

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Contact:
Brian@moneyguy.net
http://moneyguy.net