A 6.1% withdrawal rate, a 14% drawdown and a request to go to 85% equities
Susan, 67, retired two years ago with a HK$9.2 million portfolio in a 60/40 allocation. She draws HK$40,000 a month, HK$480,000 a year, which was about 5.2% of the starting value. After two years of withdrawals and a 14% fall in the equity sleeve over the last twelve months, the portfolio is worth HK$7.9 million. Her only guaranteed income is HK$6,000 a month from a deferred MPF annuity. She holds HK$450,000 in cash outside the portfolio and has no long-term care cover. She has now asked the adviser to move to 85% equities "to catch up the losses", and to raise her draw to HK$44,000 a month so she can help her daughter with a flat deposit this year. Her father lived to 94 and she expects a similar lifespan. Portfolio charges are about 1% a year.
1. Quantify Susan's position and state what the numbers imply.
Read the worked answer
Current withdrawal rate. HK$480,000 ÷ HK$7,900,000 = 6.1%, up from 5.2% at the start. If the draw rises to HK$528,000 a year, the rate becomes 6.7%.
Required return. Add the 1% charge: she needs roughly 7.1% a year nominal before tax just to hold the portfolio flat in money terms, and more than that to keep pace with inflation over a 27-year horizon. Sustained real withdrawals at that level have historically carried a high failure probability, and failure here means running out at 90 rather than at 75.
What is driving the deterioration. Two effects are compounding: the withdrawal itself and the equity decline. On a HK$7.9 million base, a 14% equity fall took roughly HK$660,000 off the equity sleeve while HK$960,000 was withdrawn - the portfolio is shrinking faster than the plan assumed, and the plan was already near the top of the sustainable range.
Unpriced liabilities. No long-term care cover with a family history of longevity to 94, and a request for a capital gift this year that is not in the plan. Both are claims on the same pool.
Implication. The problem is not the allocation alone; it is that spending is above what the portfolio can sustain. No asset mix turns a 6.7% withdrawal rate into a safe one. The spending question must be answered first.
2. Evaluate Susan's request to raise equity exposure to 85%.
Read the worked answer
Her reasoning is a break-even effect - "catch up the losses" - and it is one of the most damaging instincts in decumulation. Raising equity after a fall increases the volatility of a portfolio that is simultaneously being drawn on.
Sequence-of-returns risk. For an accumulator, a fall early is a buying opportunity. For Susan, a 35% equity decline in year three with a 6.7% withdrawal means selling depressed units to fund spending, permanently removing the units that would have driven the recovery. The same average return delivered in a different order produces a materially different outcome, and she cannot choose the order.
Her horizon cuts both ways. To 94 she needs real growth; an all-cash portfolio loses to inflation over 27 years. So the answer is not zero equity - an 85% allocation is wrong, but so is capitulation to cash. The appropriate structure is a moderate equity core sized to the spending she can actually sustain under a bad sequence.
Capacity. With HK$6,000 a month of guaranteed income against HK$40,000 of spending, virtually all of her spending is portfolio-dependent. Capacity for loss is correspondingly low, and an 85% allocation would be a risk-profile override that no documentation could make suitable.
Conclusion. Refuse the 85% request with the reasoning above, in writing, using her own numbers. Offer an allocation in the 45–55% equity range with a multi-year spending reserve, and explain that the recovery she wants comes from spending discipline and a floor, not from leverage on the equity sleeve.
3. Design a response covering the allocation, the income floor and the daughter's gift, and state the review triggers.
Read the worked answer
1. Separate the gift from the plan. A one-off payment to the daughter is a capital withdrawal, not a change to the ongoing draw. Fund it from the HK$450,000 cash plus short-dated bonds, cap it at an amount that does not breach the reserve, and record it as a named, dated, non-recurring reduction. If it cannot be funded without breaking the reserve, the honest answer is a smaller gift or a loan - do not raise the ongoing draw to finance a one-off.
2. Build a floor. Hold three years of essential spending (about HK$1.4 million) in deposits and short bonds so that no equity sale is forced in a drawdown. Then consider using part of the portfolio to buy a lifetime annuity or a deferred annuity to lift guaranteed income above HK$6,000 - mortality credits are the one advantage she has that the bond market does not offer, and a higher floor reduces the rate she must take from risky assets.
3. Set the allocation and the rules. Around 50% equity with the reserve bucket, rebalanced on thresholds rather than sentiment.
4. Guardrails. Pre-agree that a withdrawal rate above 5.5% triggers a spending review and a 10% cut; that a portfolio fall of more than 15% in a year pauses discretionary spending automatically; and that the plan is re-run annually or on any health event. Put the numbers in the letter of engagement - decisions made in advance are the ones she will actually follow.
5. Address care. Price long-term care cover while she is insurable; if she declines, earmark a ring-fenced reserve and record the decision. Review triggers: withdrawal rate, portfolio value, health change, any further family request.