The Safe Withdrawal Rate
/Most people want to enjoy their retirement—doing things and going places while they are still young enough to do them—all the while making sure they don’t spend their nest egg too quickly. Since we don’t know what the future holds, especially how long we will live and what level of care we will need in our later years, there is a fine line between the two.
There has been a lot of research done on how much a retiree can withdraw from their portfolio and still have a high probability they won’t run out of money within their lifetime, known as the safe withdrawal rate. The 4% rule was born from that research in 1994. In summary, the 4% rule says for an investment portfolio consisting of 50% stocks and 50% fixed income, history has shown a retiree can withdraw 4% of the portfolio value the first year of retirement, then increase that amount by inflation each year. Subsequent research in the 1990s incorporated different time periods and asset mixes, but generally supported the initial research.
Moving into the 2000s, more analysis has been done on this subject with some waving the caution flag that 4% is too high going forward because of current low bond yields (that was 2013). Other studies have recommended withdrawal rates fluctuate with market conditions. In other words, retirees must be flexible—more specifically, lowering distribution rates in down markets or forgoing inflation increases after years with negative returns.
There are many moving parts to the safe withdrawal rate question—life expectancy, stock/bond allocation, investment returns, inflation, and more—so withdrawal rates are not
set-it-and-forget-it. Monitoring portfolio withdrawals annually is needed to ensure retirees can make course corrections quickly enough not to do irreparable damage to their portfolio but still can enjoy the fruits of their labor.
If you’re retired, one of the first things we look at as your financial planner is your portfolio withdrawal rate. Therefore, you can rest assured we will provide feedback if it looks like you’re enjoying your retirement a little too much.
- Juli Erhart-Graves, CFP®, Worley Erhart-Graves Financial Advisors
