Retirement planning? Sounds boring and stuffy. Nothing that you want to deal with at the age of 40 or 50. But the earlier you get an overview, the better you can manage your financial situation in old age. We use simulations to show what is possible with a withdrawal plan from exchange-traded index funds (ETF). Anyone who has built up a fortune with an ETF portfolio as additional retirement provision will want to reap the benefits of their investment at some point. Then the question arises of how a flow of money can be generated from regular payments from this portfolio that will last until the end of your life. Developing such a withdrawal plan is not trivial. After all, it is a matter of landing as precisely as possible. If you approach things too conservatively and take monthly or yearly amounts that are below your means, you can be pretty sure that you will not go bankrupt. But you have to tighten your belt and practice abstaining from consumption. If you still have a large fortune at the end, your heirs will be happy. If, on the other hand, you allow yourself a pension that is too generous from your withdrawal plan, you run the risk that your assets will not suffice and that you will have to live exclusively on payments from other sources such as the statutory pension in the last few years of your life . It doesn’t have to be a broken leg. But most people should feel more comfortable if they can also rely on a reliable payout plan.
Withdrawal plan: an invoice with many unknowns
Many consumers start planning online with a payout plan calculator. With this you make the first serious mistake. With a payout plan calculator, you only need to specify the return you expect on average per year for the planned time of the withdrawal phase. This ratio is of course unknown in an ETF portfolio made up of risky investments. It has to be appreciated. For example, you can use the historical average return that your ETF portfolio has generated over the past decades. Whether you are right is written in the stars. You also need to estimate your remaining life expectancy – the next element of uncertainty that the insurance industry calls “longevity risk” from its perspective . If you then enter the amount with which you will start your withdrawal plan, the payout plan calculator will spit out an amount that you can withdraw monthly or annually.
Payout plan calculators are systematically wrong
fact that you have to estimate the return and life expectancy is not the biggest shortcoming. Because you could make different calculations with different estimates and thus get an idea of the range of possible payout flows. The real problem is that the payment plan calculators calculate with an average annual return. The likelihood that an ETF portfolio will produce the same return 25 years in a row during the withdrawal phase is close to zero. In reality, returns on securities fluctuate – and sometimes significantly. How successful a withdrawal plan is, however, largely depends on the order of the monthly or annual returns. The decisive factor is the income in the first few years when there is still a lot of capital in the payout plan. What happens towards the end of the withdrawal period, on the other hand, is less important (with an ETF savings plan it is the other way around).
Withdrawal Plan: The Risks – And How To Manage Them
With withdrawal plans with a mixture of equity ETFs and bond ETFs, there are two risks: One is the risk of going broke before the planned payout phase ends. Financial market researchers call the other risk “standard of living risk ”. This refers to fluctuating payment amounts. Depending on which withdrawal strategy an investor chooses, he can always eliminate one of these two risks. The bankruptcy risk exists with payout strategies in which a fixed amount is regularly withdrawn from the portfolio. If, on the other side, the payments are variably adjusted to the market development, there is no bankruptcy risk. In return, however, the amount of withdrawals fluctuates – and thus the possible consumption.
Withdrawal plan: How to reduce the risk of bankruptcy
The bankruptcy risk you can live with is an individual decision. There are various levers that you can use to reduce the risk of bankruptcy: Improve the diversification of your ETF portfolio to reduce fluctuations in value. That leads to a higher probability of survival – and it doesn’t cost you anything. You can find suggestions for mixes of asset classes in our ETF portfolio guide . You can further diversify the multi-asset portfolio of seven risky asset classes favored therein by adding safe euro government bonds and overnight money. If you also diversify sensibly, the bankruptcy risk can drop to 0.9 percent.
Withdrawal plan with ETF: the practical implementation
Putting a withdrawal plan into practice is easy: always sell the ETFs in your portfolio that have done better than the other s first. In this way you keep the selected portfolio weighting in balance. During stock market crashes, however, you should also keep an eye on the spreads, the differences between the buying and selling prices. During the corona crisis, for example, the spreads of bond ETFs widened enormously because trading in bonds was disrupted. In such phases you should only sell ETFs that have spreads in the normal range. With every withdrawal from your portfolio, the custodian bank collects a fee for placing the order on the respective stock exchange. With monthly payouts it is therefore particularly important to choose a cheap online broker. Reducing trading costs by only withdrawing money from your custody account every six months or in the case of long-term rises in stock market rates, this does not make any sense each year. Then there is less capital available that can generate income. This negative effect usually outweighs the advantage of lower trading costs.
Fair value recommendations
There is no ideal solution for a withdrawal plan. Choose the strategy that comes closest to your preferences. You can also change the withdrawal strategy at any time. For example lower or increase the payouts or switch from a fixed monthly withdrawal to a percentage, if you suddenly feel afraid of going bankrupt. Even after a stock market crash, it can make sense to take less from the depot in order to mitigate the long-term consequences. The average monthly amount available to you is highest in the case of withdrawal plans that are designed to use up all or almost all of your assets.