Safe Withdrawal Rates - A Plan for Making Money Last?
In retirement, it's not necessarily the amount of money in your portfolio that may cause some anxiety, but the uncertainty of your longevity. How long will your money last? With whatever you have accumulated, how much can you plan on withdrawing from your portfolio without there being a significant chance of outliving your assets?
Preparing for a safe withdrawal rate increases the probability that you won't run out of money. Safe withdrawal rate refers to the amount of money that can be withdrawn from your portfolio each year, with future withdrawals adjusted for inflation, where there is a high likelihood that your money will last for your remaining life expectancy.
For planning purposes, most research studies have shown that between 4% - 5% can be withdrawn the first year with the dollar amount increased for inflation each year. Taking a conservative 4% rule-of- thumb, this has major implications for investors who need to plan accordingly. For those still in the labor force, early decisions for consideration may include:
- Should I plan on working longer?
- Do I need to increase my savings rate?
- How must I increase my current discretionary income?
- Should I lower my retirement spending goal?
Those already in retirement should consider whether current or planned withdrawals place their assets at risk of early and rapid depletion. Having an analysis of this sooner, rather than later, allows for decision making and corrective courses of action while your circumstances leave some flexibility in the options that might be available. For retirees, income distribution planning is an area of retirement planning that still has relevance for their future yeas and future finances. Adjustment strategies can include both investment and lifestyle considerations. The close monitoring of your portfolio and spending, with the help of a competent financial advisor, can give you the confidence to spend comfortably on what you truly desire with the timing that makes sense based on your overall retirement goals.