Archives for June 11, 2015

Dynamic Withdrawal Rates: Increase Spending Flexibility, Improve Portfolio Sustainability

The WSJ has a nice introduction to dynamic withdrawal methods and managing your portfolio in retirement. They outline a few of the more popular variations – Adjusted 4%, Floor-and-Ceiling, and Guardrail. I like learning about dynamic strategies because I think they are more applicable to the real world and involve good ole’ common sense. When my portfolio is crashing and my dividends are getting cut, I think I’ll be fine with pulling back a bit as everyone else will likely be doing the same. If your investments have a good run and your income stream grows, and then you can spend a bit more.

Here’s an infographic they put together to help visualize one type of dynamic strategy called “floor-to-ceiling” (click to enlarge):


Vanguard’s Managed Payout Funds are also designed to aid in portfolio withdrawals, using dynamic methods but adding in a smoothing component so that your income won’t swing as wildly from year-to-year. I don’t plan to buy those funds, but I might use their smoothing idea.

I am a conservative investor, so I don’t know about using dynamic withdrawals to justify a 5% average withdrawal strategy, though. It would just make 4% for 30 years less scary. In my case, I’m considering 3% dynamic for 50 years.

Vanguard’s Low-Cost Funds Winning, Low-Cost Portfolio Management Next?

Catching up on articles, I saw that Financial Times has an intriguing profile of Vanguard. If you’re not a hardcore Boglehead, you will likely discover some new bits about this company started by Jack Bogle and pioneered index fund investing. (I’d like to eat in their “galley” one day.) Everyone seems to be commenting on Vanguard’s growing popularity, and this chart supports the idea that lower fees have led to greater assets under management.


I wanted to highlight a portion that aligns with my own investment philosophy (yup, confirmation bias):

Vanguard stresses it is not solely an index fund shop. It runs actively managed bond funds, too, and equity funds whose stockpicking it outsources to a roster of sub-managers such as Wellington Management Company. These active managers are charged with delivering “alpha”, returns in excess of the market.

“We’re not an indexing shop or an active shop, we’re a low-cost shop,” says Mr Buckley. “We believe that there is alpha, just that it is fragile and if you have high expenses you will destroy it.”

Costs matter, especially management fees and taxes. Beating the market (alpha) is possible but probably much harder than you think. Vanguard’s low-cost funds, both active and passive, have won the money of investors.

Will Vanguard’s dominance grow to include low-cost portfolio management? While I am definitely tracking all the new start-ups like Betterment and Wealthfront, you could technically say that Vanguard’s Target Retirement 20XX Funds were the first low-cost “robo-advisor” solution with no additional markup over the underlying fund expenses. With the official launch of the Vanguard Personal Advisor Services product, you can now have a human advisor to talk to for just 0.30% annually.

The best part of any low-cost portfolio management service is that you can focus on your savings rate, which is really more important than Betterment vs. Vanguard vs. iShares vs. whatever.

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