A. There are traditional rules to retirement asset distribution - a. Use only portfolio's interests and dividends; b. Take 4% of the retirement asset at the beginning year, then adjust that amount annually with inflation. Unfortunately, each of these two traditional methods have serious flaws.
a. Use Only Portfolio's Interests and Dividends
The major flaw of this strategy is that the need for interests and dividends may influence asset allocation, which might need to overweight in certain risky asset classes, such as bank stocks. Also, by leaving the principal untouched may negatively impact the quality life of the retirees, although heirs will be very happy.
b. Start With 4% Then Adjust With Inflation
The major flow of this strategy is that the amount it takes out each year is a rather fixed amount, and fails to respond to actual realized investment returns each year. In a poor performing year, the portfolio could be seriously hurt by still taking a fixed amount.
Is there a better retirement asset withdrawal strategy? The answer is yes, we will discuss in our next blog post.