Retirement planning centers on one crucial aspect: determining a safe withdrawal rate (SWR) from your retirement savings to ensure it lasts as long as needed. A common benchmark, known as the 4% rule, was introduced by financial planner William Bengen in 1994. The 4% rule suggests that retirees can withdraw 4% of their initial portfolio in the first year, adjusting for inflation in years following, with a high probability of those funds lasting 30 years. This rule assumes a balanced portfolio of 50% stocks and 50% bonds based on data from 1926 to 1976.

Perhaps That Research is Outdated – What is a Safe Withdrawal Rate Today?

More recent analyses, including those from Morningstar, indicate that the 4% rule might be too optimistic, these recent analyses suggest a lower withdrawal rate, potentially closer to 3.7% as a SWR.

However, a recommendation for SWR does not tell the whole story, and several factors influence what constitutes a healthy withdrawal rate for your individual retirement portfolio. These factors may include:

• Your expected length of your retirement: the longer you expect to live in retirement, the lower your withdrawal rate should be. If your parents and grandparents lived a long time, you may need to consider a plan to spend less over a longer period or even wait a few additional years to retire.
• How your assets are invested is also a significant factor. More conservative investors are targeting more consistent but lower returns. This would dictate a lower rate of withdrawal. A more aggressively invested portfolio may allow for greater withdrawals but is more influenced by market swings.
• Market conditions also play a significant role in determining the appropriate withdrawal rate. When the economy is doing well and leads to higher returns in the portfolio, withdrawal rates may be higher without impacting the long-term stability of the portfolio. Likewise, spending in times of lower returns may need adjustment to help maximize the longevity of your portfolio. Economic conditions like inflation, and tax implications also need careful consideration and regular monitoring.

 

• Personal expenses and lifestyle can also dictate your rate of withdrawal. If your household expenses decrease with age, or if there are significant new fixed costs, these dynamic fluctuations in spending can affect your withdrawal decisions. A financial planner will look at your portfolio performance and your expected expenses on a regular basis and help you make informed decisions about both your spending and your assets.

Determining Your Safe Withdrawal Rate

In practice, determining your personal safe withdrawal rate involves multiple considerations:

• Calculating your annual spending to establish a baseline and understanding the amounts that are both necessary and discretionary.
• Simulating different scenarios using retirement calculators or tools to see how various withdrawal rates perform under different market conditions.
• If needed, considering a buffer with additional income sources like Social Security or part-time work.
• Maintaining flexibility to adjust your rate if market conditions or personal circumstances change and knowing how much to adjust.

The debate on safe withdrawal rates in retirement will never have a “one size fits all” answer, because every situation is different. It is important to understand that throughout your retirement, you and your financial planner will continue to adjust for things like market performance, increased healthcare costs, taxes and more.

The choice of a healthy withdrawal rate is highly personalized, requiring a balance between enjoying your current lifestyle while securing financial stability for the future. Engaging with a financial advisor, utilizing planning tools, and being adaptable with your strategy will help you enjoy a sustainable retirement.

Take the first step towards a secure retirement by scheduling a consultation with one of our experienced Wealth Advisors. Let us tailor a financial plan that aligns with your goals and allows you to enjoy your retirement journey instead of worrying about the future. Contact us today to get started!

 

Advisory services offered through Commonwealth Financial Network®, a Registered Investment Advisor.