Here’s another pair of tidy charts about safe withdrawal rates, or the amount you can safely withdraw from your retirement portfolio without running out. They are taken from this Blackrock page, specifically their “one-pager” 2-page PDF.

First up, this chart shows how a $1 million portfolio would have done over a 30-year period, given withdrawal rates between 4% and 8%. They specifically chose a start date of December 31, 1972 because it was right before a large drop in the stock market. Click to enlarge.

No matter what the withdrawal rate, the total balance dropped from $1,000,000 down to roughly $600,000 in the first three years. The hypothetical portfolio was 50% stocks and 50% bonds. That must have been quite stressful. The chart gives you a feel of how a lower withdrawal rate can extend the longevity of your portfolio.

The second chart uses Monte Carlo probabilistic modeling to show you the percent chance that your assets will last for retirement, given several variables. You can adjust the time period (20 to 30 years), the portfolio asset allocation (from 20% to 100% stocks) and your withdrawal rate (1% to 10%). Click to enlarge.

I wouldn’t use these as definitive numbers, and there are other similar scenario generators out there. Just consider them another data point to add to the collection. Note that all the scenarios above assumed a fixed withdrawal strategy as opposed to a more flexible dynamic withdrawal strategy.

There is a lot of focus on how to accumulate a big nest egg, but possibly even more complicated is how to spend it down. Vanguard Research has released a new whitepaper called From assets to income: A goals-based approach to retirement spending [pdf] (companion article). The three major topics covered are (1) spending rules, (2) portfolio construction, and (3) tax-efficient withdrawal ordering in retirement. This is a long, dense paper covering a lot of ground, so here are my highlights of just the dynamic spending rules.

The two major competing goals of spending strategies are:

1. You want your nest egg last for the rest of your life. Well… yeah. If your portfolio drops 25%, your stress level goes way up.
2. You want a consistent level of income. Everyone likes a reliable stream of income, especially if you’re used to a reliable paycheck during your working years. Having income drop by 25% on year can also be quite painful.

One major consideration is your initial, or target portfolio withdrawal rate. Here’s a figure showing how four primary factors can affect this choice: time horizon, asset allocation, flexibility in annual spending, and how certain you want to be that your portfolio won’t be depleted.

Another major consideration is how to adjust your withdrawal each subsequent year. Vanguard supports a hybrid solution called “dynamic spending” that is a compromise between someone who completely ignores market performance (reliable income most important) and someone who is completely dependent on market performance (portfolio lasting forever most important).

Here’s how dynamic spending works.

1. Once a year, multiply your current portfolio balance by your (initial) target portfolio withdrawal rate. This is your unadjusted target spending for the year. For example, $1 million times 5% = $50,000.
2. Determine your ceiling (maximum) and floor (minimum) based on last year‘s spending number. For example, you may say that it can only increase by 5% or decrease by 2.5%. If this is your first year, just stick with your existing number.
3. Compare the two numbers. If your unadjusted number exceeds the ceiling amount, spend the ceiling. If your unadjusted number is below the floor amount, spend the floor. If unadjusted number is in between, the unadjusted amount becomes your final number.

For example, if last year’s spending was $50,000, then your upper and lower “bumpers” for this year will be $48,750 and $52,500. No matter what the market does, you’ll stay in between these two numbers. You can see a worked-out example using actual numbers in this previous WSJ article.

Your flexibility is rewarded with better portfolio survival odds. Here’s the results of an analysis with the following assumptions: moderate asset allocation of 50% stocks (60% U.S. equity, 40% non-U.S. equity) and 50% bonds (70% U.S. bonds, 30% non-U.S. bonds), a time horizon of 35 years, and initial portfolio withdrawal rate of 5%.

You can see that your portfolio success is improved significantly, even with a relatively high target withdrawal rate of 5%. You can see here that Vanguard picked the 5% ceiling and the 2.5% floor because it provided a portfolio survival rate of 85% over a 35-year time horizon.

Being flexible during periods of poor performance is most important. Vanguard found that a retirees’ ability to accept changes in their floor helps their portfolio more than increasing their ceiling hurts it. Here’s a modified chart from the paper that shows how your portfolio survival rate improves with a lower floor percentage.

You have to be careful, as having your withdrawals drop 5% a year for 5 straight years might be more than you can handle. You should carefully examine how much flexbility you have in your spending, taking into account other income sources like Social Security. In general, the numbers support Vanguard’s suggestion of a 5% ceiling and 2.5% floor as a good starting point.

Finally, here are some initial/target withdrawals that will get you 85% survival certainty for various time horizons and asset allocations. Click to enlarge. I’d prefer to see some numbers with a 95% survival certainty.

Since my time horizon is (hopefully) closer to 50 years and I want a significantly higher survival certainty, I am personally thinking about a 3% target withdrawal rate combined with a 5% ceiling and 2.5% floor.

We’ve all heard that you should keep an emergency fund in case of unexpected expenses or unemployment. But what if you don’t have the cash? Personal finance author Jonathan Clements presents a mathematical argument for using your 401(k) as an emergency fund in his recent article The Terrible Twenties. Here’s how the math works.

Let’s say you are in the 15% federal income tax bracket and you put $2,000 in your employer’s 401(k) plan. Your out-of-pocket cost would be $1,700, thanks to the initial tax savings. At the same time, your employer matches your contributions at 50 cents on the dollar, with the matching contribution vested immediately. Result: Your $2,000 investment gets you a $1,000 match, bringing your account balance to $3,000.

If you are then laid off and forced to liquidate your retirement account to pay living expenses, you might lose 15% to federal income taxes, plus another 10% to the tax penalty for making a retirement account withdrawal before age 59½. That combined 25% hit would still leave you with $2,250, well above your $1,700 out-of-pocket cost.

To be fair, this isn’t nearly as radical as it seems. Most prioritized lists of “where I should put $XXX?” will put a 401(k) up to the company match as the #1 priority, even above a cash emergency fund.. A company match gives you a way to earn a 50% or 100% instant, risk-free return on your money. This is a rare opportunity that you shouldn’t pass up.

However, not mentioned is that after you exhaust any 401(k) match, you could also consider contributing to a Roth IRA and using that as your emergency fund. The primary reason for this is that Roth IRA contributions can be taken out at any time, without penalty. Unlike Traditional IRAs, withdrawals from Roth IRAs are subject to ordering rules (see Chapter 2 of IRS Pub 590-B), which state that you always withdraw your own contributions first.

In either case, since you can only contribute a certain amount to 401(k) and/or IRAs every year, it would be wise to take advantage of this tax-sheltered space as much as possible. Don’t make a withdrawal if you can avoid it, but if you have limited options, it can make sense to contribute first and hope you can keep the money invested for retirement.

A new ProPublica article by Lena Groeger discusses the power of default settings in our life – from organ donations to computer font settings. Included was an interesting case study of a company who implemented automatic enrollment into the company 401(k) for new employees. Here’s the drastic difference in the 401(k) participation rate (vs. time at company) for the two groups, auto-enrolled (AE) and not:

Keep in mind, in both cases the employees could have changed their participation status at any time. No change was ever required, only the default initial setting was changed.

The study cited also points out the auto-enrolled default settings could also make some employees save less than they would have otherwise. For example, if the initial deferred percentage is only set at a 2% savings rate however, many people will just stick to that number whereas if they picked on their own it would be higher. People may believe the default setting to be the “expert recommended” or “popular” choice.

The same thing applies for escalation of savings over time. If there is no auto-escalation feature that increases the savings rate as income increases, some people will stay at the initial default savings setting for years or decades.

Suggested Best Practices. By combining their findings, the following best practices are presented as an example.

1. Auto enroll all current and future employees into the plan.
2. Set the initial deferral percentage at no less than 6 percent.
3. Employ an automatic increase of a 1 or 2 percent deferral rate, to a maximum of no less than 15 percent.

Most of have a lot of great goals (eat better, save more, waste less time), but it will always be hard to make the best decisions all the time. We should respect the power of default settings, and use the same concept to help keep us on the right path for the future. For example, at our company retirement plan, we have an auto-escalation feature but we must opt-in manually. If I invest the energy to turn that option on today, we’ll have a better default for future years, knowing we might get lazy in the future.

Target Date Funds (TDFs) get their name because they adjust their portfolio holdings automatically over time based on a given target retirement date. The overall growth of TDF assets continues, especially within employer-based 401(k) and 403(b) retirement plans. Morningstar recently released its 2016 research study called 2016 Target-Date Fund Landscape:

After laying out a general overview of the target-date industry, this year’s report highlights analysts’ best practices in comparing and contrasting target-date series according to Morningstar’s ratings pillar framework, demonstrating the benefits of going beyond conventional evaluation practices.

I found the report full of interesting statistics and insights, but at 84 pages it is also rather long. Here are what I consider the highlights.

The Big 3 providers are still Vanguard, Fidelity, and T. Rowe Price. As you can see below, they combine for 70% of all TDF assets. This number is actually slightly lower than three years ago, however. Vanguard is the current leader, taking over Fidelity’s spot.

All Target Date Funds are NOT created the same… Consider the huge gap in possible equity percentages vs. time (glide path).

…but the Big 3 TDFs are all relatively similar. Before retirement age, the glide paths are very close. They start to differ more significantly after the retirement target year.

Vanguard leads the way with the highest total assets, lowest expense ratio, and the only Gold Morningstar Analyst Rating. You can feel the effect of Vanguard in that the average asset-weighted expense ratio has decreased industry-wide every single year since 2009. You can bet that this wouldn’t be the case of Vanguard wasn’t so successful.

We personally have access to T. Rowe Price and Fidelity TDFs in our respective 401k plans, although we don’t own shares of either. I would recommend my own family to buy the Vanguard Target Retirement family of funds. If you own one of the lesser-known TDF families, I would download the Morningstar paper and see how it compares. You may be surprised by the inner workings.

John Oliver again tackled personal finance on his HBO show Last Week Tonight, this time exploring retirement savings. (He previously covered credit reports.) Here is the full video link, embedded below:

It is truly hard to present this stuff in an entertaining manner, so I was interested to see how they would approach things and who’d they pick on. It’s not bad considering it runs 20 minutes – quite long for an internet video. If you skip to roughly the 17:55 mark, you’ll get the best bits – a satirical reply to widely-promoted Prudential commercials (one, two) and his top 5 retirement savings tips:

1. Start saving now.
2. Invest in low-cost index funds.
3. Ask if your adviser is a fiduciary.
4. As you get older, gradually switch some of your stocks into bonds.
5. Keep your fees under 1%.

Nothing new to most financially-savvy folks, but hopefully it helps steer some people in the right direction.