Wise Retirement Withdrawals
Submitted by Larry Frank Sr. on Fri, 08/08/2014 - 12:00pm
Saving for retirement is one thing, spending those savings wisely another.
One school of thought says you must withdraw consistently from your
savings to simply avoid exhausting cash before you die. Another believes
in adjusting withdrawals depending on changes in your later years. Which
is right for you?
The first method, safe withdrawal rate (SWR), looks at historic sequences
of poor market returns and addresses the safest income withdrawal rate
you can start with during the worst of times and still not run out of money.
The second is what I call dynamic updating, or reviewing your life
circumstances in retirement and updating your withdrawal rate each year.
(I’m not saying one method beats the other, just that you can compare the
two. My research does show that SWR doesn’t explain how or when to
transition your retirement withdrawals and spending.)
For example, the retirement 4% rule says that, if you withdraw roughly 4%
of your savings annually for 30 years’ retirement, you stand a good
chance of not outliving your money. In a recent presentation, noted
financial planner Michael Kitces cited only three times of extraordinarily
bad economies and markets when a new retiree’s wisest withdrawal rate
was 4%. In all other times, new retirees can withdraw at higher rates –
making the 4% rule ultra-conservative.
What low does your portfolio value need to reach before you need to
consider cutting spending? How does this spending compare with the 4%
rule? And how does reduced value work as you continue to age?
Let’s look at a couple, both 60 and who expect to live another 29 years
after retiring. They want to begin withdrawing from their total $1 million in
retirement savings. They allocate 25% of their long-term portfolio to
equities; they pull retirement income from their distribution reservoir
portfolio of cash and short-term bonds.
(Let’s say this couple also has pre-calculated decision points if markets
misbehave and portfolio values decline. Such emergency procedures
allow you to make non-emotional decisions during emotional times –
critical for success with your retirement income.)
With dynamic updating this couple can withdraw approximately $46,400
this year, $3,867 a month or 4.64%. Using a possibility of adjustment
percentage, the couple sets plans to reduce monthly withdrawals to
$3,477 if their long-term portfolio value sinks to some $760,000.
How likely is such a decline? How necessary is it for our couple to trim
spending ahead of time just in case their portfolio shrinks to far less than
Suppose they don’t wait for their portfolio to suffer; instead, they start
retirement taking just $3,477 a month from the same $1 million. They
probably won’t need to reduce spending if their portfolio drops (at least
not until the portfolio shrinks below $760,000). The withdrawal rate
above brings the couple’s yearly retirement income to $41,724 ($3,477
times 12 months) – or 4.17%, not far from the 4% rule.
In this case, SWR (the 4% rule) sets a constrained monthly income the
couple probably won’t need to reduce. The price: $390 a month, or the
difference between SWR income and a dynamically adjusting figure
($3,867 minus $3,477). This dynamic calculation also adjusts as our
couple ages and their spending diverges more from 4% (their remaining
lifetimes get shorter, allowing for higher spending rates).
Your choice is more money to spend in your retirement or more to leave
to your heirs. You may need to adjust income down a little using dynamic
updating method but you also don’t restrict your income and risk
accumulating a pile of money that outlives you.
(For more food for thought on how you can withdraw and spend in
retirement, see this fuller comparison of the two methods that I recently
Market uncertainty worries many prospective retirees. In the quest for
certainty, however, you can play it too safe and lose income potential.
Use aspects of both methods above to make better decisions about your
Follow AdviceIQ on Twitter at @adviceiq.
Larry R. Frank Sr., CFP, is a Registered Investment Adviser (California)
in Roseville, Calif. He is the author of the book, Wealth Odyssey. He has
an MBA with a finance concentration and B.S. cum laude in physics with
which he views the world of money dynamically. He has peer-reviewed
research published in the Journal of Financial Planning.
AdviceIQ delivers quality personal finance articles by both financial
advisors and AdviceIQ editors. It ranks advisors in your area by
specialty, including small businesses, doctors and clients of modest
means, for example. Those with the biggest number of clients in a given
specialty rank the highest. AdviceIQ also vets ranked advisors so only
those with pristine regulatory histories can participate. AdviceIQ was
launched Jan. 9, 2012, by veteran Wall Street executives, editors and
technologists. Right now, investors may see many advisor rankings,
although in some areas only a few are ranked. Check back often as
thousands of advisors are undergoing AdviceIQ screening. New advisors
appear in rankings daily.
Withdrawals from 401Ks