Jonathan Guyton and Michael Kitces are both leading advocates of systematic withdrawal strategies for retirement, as Wade Pfau pointed out in a recent post. Pfau observes that "it is somewhat uncommon to hear rigorous intellectual defenses of systematic withdrawals." Most academics prefer other strategies with greater downside protection.
The video is informative and I suggest you watch it regardless of how you feel about "safe withdrawal rates." Guyton and Kitces are two very bright people, but I am not a fan of systematic withdrawals except for households who have a lot of savings.
When I say "a lot", I'm referring to those over-savers who need to spend perhaps 3% or less of their savings every year in retirement. They probably have adequate risk capacity to manage the downside of SW.
As I watched this interview, I realized that I am perhaps not as far from Michael's position as I had thought. If you're wealthy enough, I have no problem with SW, and that is the target market for most financial planners. I focus my attention more toward retirees who are not over-savers, for whom I believe SW is often a very risky approach.
Risk tolerance, or how much risk lets you sleep at night, is different than risk capacity, or how much risk you can afford to take. (Here's a cute analogy to explain the difference.) Risk capacity is the limiting factor when choosing a retirement strategy and the more wealth you have relative to your annual spending, the greater your risk capacity.
Kitces notes in the video that in many cases the overall portfolio constructed with a floor-and-upside strategy (or "discretionary - non-discretionary strategy", as it is called in the video) is practically identical to what would be required for a SW strategy. This is technically accurate, but omits important points.
First, a major purpose of floor-and-upside and time-segmentation strategies is to make retirement finances more transparent and manageable. We could, using the same logic, organize our household budget into just two categories: "income" and "stuff I need to pay for". That wouldn't provide much transparency into our budget, however, so we create subcategories for food, rent, transportation and the like.
In this same way, floor-and-upside and time-segmentation strategies create subcategories, or "buckets", to help us visualize where the money will come from to pay our living expenses in future years, or whether a shortfall will jeopardize groceries and housing, or just the cable bill.
In other words, these strategies help us manage our retirement plan.
Time-segmentation attempts to minimize the risk of needing to sell assets when they are cheap and to provide a safe source for near-term spending. Floor-and-upside tries to ensure that in the worst case we can still pay for non-discretionary expenses. SW lumps them all into one large "total return" bucket, much like the "stuff I need to pay for" category.
The second important but unmentioned point is that SW recommends a spending rate that some might consider safe or sustainable. Life annuities also determine a spending rate based on the payout rate of the annuity we purchase. The SW rate is probabilistic while the annuity payout is contractual.
Time-segmentation and floor-and-upside strategies, to the contrary, do not inherently calculate a spending rate. SW rules of thumb and consumption-smoothing are two ways one could establish such a rate for these strategies.
Lastly, these strategies rebalance asset classes differently. The asset allocations may start out being quite similar, but they will most likely drift apart over time.
These are important differences
the strategies provide different spending, different risks and different asset allocations over time. The initial portfolio allocations may be "practically identical", but the strategies are not.
I find comfort in the observation that the strategies frequently have similar initial portfolio allocations because I would have a hard time explaining why they wouldn't.
One of them will perform best for you over your lifetime. Unfortunately, we can't predict which one that will be. That's the bet you have to make.
Kitces also mentions in the interview his personal quandary, which he has stated before, that a retiree who expects a wonderful retirement might consider it a failure if that retirement only turns out to be OK. This is the tradeoff one makes when forgoing the possible upside standard of living with the SW strategy in order to mitigate the risk of going broke in old age with a floor-and-upside strategy.
Personally, I don't understand the quandary. If I were offered the opportunity to take the worst-case scenario off the table (dying broke) by giving up the possibility of more trips to Europe and a second home, I'd jump at it.
But, that's a decision retirees with a lot of wealth will get to make for themselves.