Retirement withdrawal rates key to sustainable retirement funds

Unknown

Your retirement lifestyle will depend on your assets and investment choices, but also on how quickly you draw down your retirement portfolio. The annual percentage you take out of your portfolio, whether from returns or the principal itself, is know as your withdrawal rate. Figuring out an appropriate initial withdrawal rate is a key issue in retirement planning, and presents a number of challenges.

Why is your withdrawal rate important?
Take out too much too soon, and you might run out of money in your later years. Take out too little, and you might not enjoy your retirement years as much as you could. Your withdrawal rate is especially important in the early years of retirement, as it will have a lasting impact on how long your savings will last.

Conventional wisdom
One widely used rule of thumb states your portfolio should last for your lifetime if you initially withdraw 4% of your balance (based on an asset mix of 50% stocks and 50% intermediate-term Treasury notes), and then continue drawing the same dollar amount each year, adjusted for inflation. However, this rule has been under increasing scrutiny.

Some experts contend a higher withdrawal rate (closer to 5%) may be possible in the early, active retirement years if later withdrawals grow more slowly than inflation. Others contend portfolios can last longer by adding asset classes and freezing the withdrawal amount during years of poor performance. By doing so, they argue, “safe” initial withdrawal rates above 5% might be possible.

Still other experts suggest our current environment of lower government bond yields may warrant a lower withdrawal rate, around 3%.

Don’t forget, these hypotheses are based on historical data about various types of investments, and past results don’t guarantee future performance.

Inflation is a major consideration
An initial withdrawal rate of, say 4% may seem relatively low, particularly if you have a large portfolio. However, if your initial withdrawal is too high, it can increase the chance that your portfolio will be exhausted too quickly, because you’ll need to withdraw a greater amount of money each year from your portfolio just to keep up with inflation and preserve the same purchasing power over time.

In addition, inflation may have a greater impact on retirees. That’s because costs for some services, such as healthcare and food, have risen more dramatically than the Consumer Price Index for several years. As these costs may represent a disproportionate share of their budgets, retirees may experience higher inflation costs than younger people, and therefore might need to keep initial withdrawal rates relatively modest.

Your withdrawal rate
There is no standard rule of thumb. Every individual has unique retirement goals and means, and your withdrawal rate needs to be tailored to your particular circumstances. The higher your withdrawal rate, the more you’ll need to consider whether it is sustainable over the long term.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

Speak Your Mind

*