The first method, that I call the Structured Investment Income method, relies on the cash flows generated from the investments in the form of dividends and interest. This method focuses on pairing retirement expenses with income from the portfolio, social security, pensions, and any other sources. By analyzing the expenses and dividing them into non-discretionary and discretionary liabilities, we can structure your portfolio in a way designed to pay for expenses with assets that are most suitable for that part of the budget.

Dividends are much more stable than the fluctuating prices of most stocks, hence much of the worry about market volatility is lessened. As companies increase their stock dividends, your income may keep up with, or in some cases even exceed inflation. Keep in mind dividends are never guaranteed with any stock or company. A second component of the portfolio consists of a series of bonds with consecutive annual maturities, thus creating a bond ladder. This bond ladder seeks a more stable source of income than stocks, and it can be used as a foundation to cover the non-discretionary expenses.  The third investment component, a single premium deferred annuity, can be used to augment the bond ladder or if you desire guaranteed income for life to cover any portion of your expenses. These three seek to deliver a reliable and sustainable cash flow.

The second method, called the Safe Withdrawal Rate, was introduced in the mid 1990’s, and is generally better known as the 4% rule. This method is widely used by financial advisors in their quest to determine a client’s maximum percentage of the portfolio that can be withdrawn annually.  The withdrawal rule of thumb has been 4% for many years, but with low interest rates and high stock valuations today, many people are saying that 3% may be more appropriate. Another name for the strategy is the Probability-Based method because of the use of simulations performed to estimate how much an individual can spend without outliving their assets. 

This strategy relies on a well-diversified portfolio of stocks, bonds and other assets, and the focus is on the capital appreciation of the assets rather than on income generated from dividends (although diversification is no guarantee against investment loss). Since income is not the focus, assets must be sold annually to create cash for withdrawal. This creates a good deal of reliance on the performance of the markets. While running historical simulations with Monte Carlo computer programs can help, the results are only as good as the models used to generate the simulations and the assumptions made at the input stage.