Systematic Withdrawal Programmes

September 11th, 2012

A Systematic Withdrawal Programme (SWiP) is an approach to funding retirement by withdrawing the amount needed to support your lifestyle at regular intervals. While this approach is simple and inexpensive (in terms of fees and commissions), it is interesting to analyze systematic withdrawal programmes (SWiP’s) in terms of the risks of retirement.

Withdrawal Rate

The most basic problem with SWiP’s is determining a sustainable rate of withdrawal. A considerable amount of research has concluded that 4% a year is sustainable. The problem is that this is based on the historical performance of stocks, bonds and other investments. As demonstrated by events of the last four years, extrapolating from the past into the future has risks of its own.

Longevity

The real risk of using an unsustainable withdrawal rate is that the client will deplete their savings. At the other extreme, to the extent that the withdrawal rate was too low, the client will leave an estate larger than planned or desired.

Inflation

To the extent that a portion of savings is invested in equities, it is reasonable to assume that investment performance will have an upside that protects against inflation. Unfortunately, equities historically have experienced volatility which exposes the client to the risk of….

Sequence of Returns

Particularly in the “retirement risk zone”  –that is the 5 years before and after retirement–  the consequences of poor returns are very serious. As investment time horizons shrink, the ability to recover from downside performance is diminished.

Liquidity in the Event of Health Issues

Clearly, this strategy provides access to lump sums for emergencies. The obvious problem here is depleting savings and adversely affecting future lifestyle budgets.

Product Allocation

Allocating assets to different investment classes (equities, fixed income) is a big concern. Managing a long term investment plan in adverse times is not easy. To the extent that the “behaviour gap” starts to operate, assets can be depleted.

My conclusions: It does make sense to have a portion of your assets available for withdrawal. I am not convinced that it is possible to define in advance a fixed sustainable rate of withdrawal. I think it is prudent to modify lifestyle spending as a function of investment performance, though I recognize that this could be difficult to implement in practice.