Sell Slowly

New US research has demonstrated that it might be possible to squeeze a little more from your retirement income portfolio by making a small change to your approach.

Nick Maggiuli’s US based financial advice firm is known for its use of data analysis, and new research by that firm has shown how you might be able to change your approach and increase the longevity of your retirement portfolio.

Nick’s researchers compared two different approaches:

  • Beginning of year withdrawals. Taking a percentage out of the portfolio at the start of January every year.
  • Quarterly withdrawals. Withdrawing the same amount, but in four instalments at the start of January, April, July and October.

Their research showed that, over a thirty year retirement, quarterly withdrawals produced a better result on every occasion. There was also evidence that the approach worked over shorter periods too – although there were examples of when the beginning of year approach worked over shorter time periods. The longer the time period, the more likely that the quarterly withdrawals would produce a better result.

The difference in returns is not much – on average the outperformance by quarterly withdrawals provided an improvement in returns of around 1.5% (in total, not per year) over a 20 year period. However, as any cycling fan will tell you, every marginal gain is worth taking.

The small size of the improvement is important and we need to take account of charges too. Most pensions and investments don’t charge you to sell investments and make withdrawals, but it would only take a small charge to negate the improvement in returns which quarterly withdrawals give you. So, some care needs to be taken before applying it across the board.

However, it’s almost important to apply a statistician’s pinch of salt to the figures. Maggiuli’s team used figures from the USA in their research, and assumed that your retirement portfolio would be invested entirely in US shares. So it may not apply across all markets and asset classes.

The use of US stockmarket data also explains why the quarterly withdrawals approach works, and why it might apply to other asset classes. As the US stockmarket has increased in value over several decades, the best course of action has been to leave as much of your money invested, for as long as possible. The quarterly withdrawals approach leaves marginally more money in your portfolio on average than the beginning of the year approach, leaving you with the potential for a little more growth. This approach should make sense with any asset where the values tend to increase over the long term – so it would even work with cash deposits where you are earning interest.

Whilst the gains may only be marginal, the approach of selling for withdrawals quarterly, rather than annually, may give you an extra advantage which is worth taking, if you believe that the assets in your portfolio will gradually increase in value over time, and there are no charges for selling assets in your portfolio.

Nick Maggiuli’s original article is available by following this link

Philip Wise |

Managing Director and Chartered Financial Planner

This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
The value of investments may go down as well as up and you may get back less than you invest.
An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA.

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