What is the safe withdrawal amount in retirement? It’s a topic that many of the top financial professionals debate on an ongoing basis. Most all agree that the first couple years beginning retirement are the most crucial. Many new retirees either tend to spend too much too fast, or market conditions like 2008 wreak havoc on their investment portfolios.
When the stock market is doing good, retirees tend to pull out more- sometimes 7%-10% of their accounts annually. When baby boomers get comfortable with this withdrawal rate and a bear market occurs, it’s a real shock that many have a hard time of coping with. Somewhere there has to be a fair balance on what is a safe amount a retiree can withdraw during retirement.
Is There Really a Standard Withdrawal Rate?
There is no “standard” retirement income withdrawal rate. Your withdrawal rate should be determined in consultation with your financial advisor, who can help you evaluate some very important matters: your risk tolerance, your age and health, and your lifestyle needs.
Many new retirees are told that a 4-5% annual withdrawal rate makes sense. If you withdraw 4-5% from your retirement nest egg annually and your investments steadily earn about 5-6% year-to-year, it is quite possible that your invested assets will last a quarter-century or longer given mild inflation.
But that’s a rather stable scenario. Even more variables come into play.
Variables That Effect Withdrawal Rates in Retirement
- Consumer costs. Over the past 50 years, consumer prices have increased (on average) about 4% annually.2 So you might assume that your portfolio should generate at least a 4% annual return just to help you keep up with the cost of living. But if you retire with that assumption and inflation should spike notably higher for some reason after you retire, you may need to adjust your withdrawal rate.
- Health care. In recent years, health care costs have increased at a much greater rate than inflation. The same goes for nursing home care.
- Stock Market Declines. When you are 35 or 40, your investments have time to rebound from a market downturn. When you are 70, things are different.
Example: If you are 70 years old, and you have $250,000 in your portfolio. All of a sudden, your portfolio has two really bad years: you lose 12% in Year 1 and 7% in Year 2. So at 72, your portfolio is now worth $204,600. You want to get back to $250,000 or better. How long will that take? Well, your portfolio would have to gain almost 23% in Year 3 to get back to that $250,000 level. So if you suffer through a couple of bad years with ill-chosen investments or ill-advised asset allocations, your nest egg may be considerably smaller and your income withdrawal rate may have to change.
Be Conservative in Your Withdrawals
With ongoing improvements in healthcare, today’s retirees stand a good chance of living into their eighties and nineties (and perhaps even longer). This is a good reason to exercise a little moderation when scheduling retirement income.
Every Retiree Needs an Income Plan
Ideally, you will retire with the help of a financial consultant who will meet with you periodically to review your investments and income needs, and adjust your withdrawal rate over the course of your retirement. If you don’t have a personalized retirement income plan, change that situation today and make sure you prepare for retirement with both.