Saving and systematic investing have always been such a significant focus of Retirement Planning that it can be an overwhelming emotional shift to start withdrawing from a portfolio. One of the hardest decisions choosing an ideal withdrawal rate to feel fulfilled now but not impair future solvency.
The withdrawal rate best for you and your portfolio depends on many factors, including downward pressure on stock prices. As discussed in many recent editions of our Macroeconomic View and Outlook, volatility in the aging global stock market recovery is increasing and can prevent portfolios from maintaining their values for a period of time. This risk increases with portfolio withdrawals during corrections, especially if made at the same pace as when markets are up.The risk is even greater for new retirees.
Retirement researcher Wade Pfau simulated this risk in a 2018 study, Two Bad Years, Two Different Outcomes. He assumed “…a 30-year retirement and an average annual return of 3%, and a new retiree with $1 million who decides to withdraw 5% a year. If the portfolio declines 15% in the first and second years of retirement, the retiree is out of money by year 21. If the retiree saw the same decline of 15% in years 29 and 30, they would still have $364,000.” Depending on the size of your portfolio, your spending vs. fixed income (pension, social security, part-time income) and your longevity, making NO withdrawals when the market is down could be a significant portfolio risk reduction strategy. This leads to the question every retiree faces: How much can I/we withdraw now to have what is needed and wanted but not run out of money in later years?
Other recent research supports varying your withdrawal rate. The old “4% Rule” is just that, old…and outdated. There are too many variables for a one-size-fits-all approach. One thing is for sure. We have to plan on living longer. “In the 1950s, people retiring at age 65 lived until 78. Today’s retirees can expect an average lifespan of 83 or 84 years – which means that half of (us) will live much longer than that.” (Kathleen Coxwell, 2017, What Are the New Rules of Retirement? 10 Guidelines for Financial Security) Indeed, we have clients in their 90s in good health, enjoying their lifestyles. As long as you are in good health, solid financial planning should include portfolios lasting into your 90s.
The Center for Retirement Research (CRR), using Required Minimum Distribution formulas, recommends the following withdrawal rates based on life expectancy: ages:60s: 3-3.5%; 70s: 3.5%-5%; 80s: 5%-8%; 90s: 9%-15%.
Determining your ideal withdrawal rate should be part of your annual financial planning review. It’s important to find a balance between being so conservative you struggle financially and the risk of running out of money. Please contact Eric at eric@sprakerwealth.com to request the forms for us to start work on your financial plan.