Executive Summary
In a world where retirement planning is increasingly about not only the accumulation phase towards retirement, but the distribution phase in retirement, financial planners must deal with the practical realities of generating retirement cash flows for clients. And although most of us may have some policies in our practices about how we generate cash flows for clients, do any of us actually have a written withdrawal policy statement in place to determine the appropriate tactics and strategies for each particular client?
The Retirement Withdrawal Policy Statement
My first introduction to the concept of a "Withdrawal Policy Statement" came from a comment made by Jon Guyton when we were participating together on a panel entitled "Real Life and Portfolio Distributions: Join the Conversation" at the FPA Annual Convention. During the session, Jon put forth the idea that we can facilitate a client's understanding of their withdrawals - how they will be made, under what terms, etc. - by having a Withdrawal Policy Statement, similar to (but separate from and different than) an Investment Policy Statement, that ties the client's goals on the one end to specific strategies and tactics to implement on the other end.
In point of fact, Jon was actually referring back to an article he published back in June of this year in the Journal of Financial Planning, which I have to confess I didn't catch the first time around. In his article, Jon provides further detail about what a Withdrawal Policy Statement (WPS) is, its purpose with clients, and a basic framework about how to develop one to use for each client situation.
In Jon's case, having a client WPS fits very nicely with the Decision Rules framework for sustainable withdrawals about which Jon has published in the Journal of Financial Planning in the past, and accordingly it includes some pretty specific criteria for implementation, such as "If the prior year's return was negative and the upcoming year's withdrawal rate would be above the initial withdrawal rate, there is no increase in the upcoming year's withdrawal for inflation" or "In years with a positive return where an equity asset class exceeds its target allocation, the excess allocation is sold and the proceeds are invested in cash to meet future withdrawal needs."
Benefits Of A Withdrawal Policy Statement
Notwithstanding the specificity of Jon's decision-rule framework in particular (which not everyone will necessarily choose to follow), audience members at the session were abuzz with the idea of having a Withdrawal Policy Statement... and I have to agree with them. From my perspective, I think the use of a WPS allows for two significant, practical benefits for clients.
The first is that by going through the process - and recording the results in a written document - clients can clearly see that there really is a plan regarding how retirement cash flows will be generated. I think that often we as financial planners fail to understand what information our clients are really seeking when they ask how to generate retirement income. In response to such questions, we often launch into an extensive discussion about our portfolio management strategies, investment philosophy, views about various financial products, etc., when in reality what our clients are looking for is an answer much closer to what a WPS would contain. "We will generate your cash flows by making a month distribution to your checking account; we will generate the cash in your brokerage account to fund these distributions by collecting dividends and interest, and if stocks have appreciated by trimming some of your gains; if the markets decline, we will instead generate your cash by liquidating the fixed income portion of your account and holding onto your stocks; etc." In other words, I think we underestimate how much clients want to hear about the very practical, real steps that will be taken to actually generate the cash flows for them to pay their bills each month. As "the experts" who do this all the time, I think we forget how important it is to go over "the basics" about how we actually implement retirement distributions, and we especially often fail to convey it as a thorough, start-to-finish process, that is written into a series of concrete action steps. Yet by going through the WPS process, that is exactly what the client will end out with; and by using the client's goals to arrive at a withdrawal policy which in turn allows the planner to derive the tactics and strategies that will apply for that particular client, the client has significant buy-in (and therefore, a lot more trust) into the process.
The second benefit of the WPS, especially to the extent that it acknowledges how distributions will be managed in the face of various market environments, is that it sets up a clear expectation and understanding of exactly how a client's distributions will be impacted by a bull or (especially) a bear market. In today's process for most clients, there is not necessarily a clearly written and articulated plan that explicitly states "if the markets do 'X', we will make 'Y' adjustments to your spending" and as a result, market turmoil leaves clients in the fearful unknown about what the consequences of a decline may be. By developing a WPS that clearly articulates how retirement distributions will or will not be adjusted, under what conditions and in what situations, takes at least some of the uncertainty out of the already-so-uncertain retirement experience... allowing clients to have more trust and confidence that their goals are being managed with a concrete plan in place, and hopefully even to sleep a little better at night.
So what do you think? Does a Withdrawal Policy Statement make sense to you? Would you consider implementing such a process with your clients? Have you already done so?
Plenty of food for thought in your suggestion, Michael. Thank you for a thoughtful ‘blog’.
Although not an advisor myself, as a private investor it makes sense at two levels for an advisor to have a withdrawal policy statement:
(1) it provides a discipline for advisors, and is something which can be monitored, and should keep the critical question of appropriate levels of distribution and portfolio construction for their clients before them, and
(2) it provides confidence to clients that the advisor is ‘switched on’ to this aspect of portfolio management and financial planning at an important stage in the life of the client. It also helps the client understand the relevant issues and provides a bridge between them and their advisor, which they can cross together.
Apart from Jon Guyton’s helpful articles and suggestions, there is also the research from William Bengen, Jim Otar, Harold Evensky, and the work of Cooley, Hubbard and Walz, as well as your own, worth looking at and taking into consideration in determining an appropriate withdrawal policy statement.
And no doubt there is plenty of more research which can be done in this area!
Regards,
Owen