StrategicPoint Safe Withdrawal Rates

“How much can we safely withdraw from our portfolio and be sure not to run out of money?” The financial services industry is awash in studies trying to answer that very question---what is a safe withdrawal rate?

Let’s start with a clear definition: an initial retirement income withdrawal rate is the amount of money you receive during your first year of retirement. It is a percentage of your investment portfolio value. Each year, the initial withdrawal amount is increased by the rate of inflation to provide you with a constant standard of living. Traditional wisdom has espoused a “safe” 4% withdrawal rate. With further research, this number has been increased slightly to 4.4%, depending on the definition of safe and the underlying asset allocation. A higher withdrawal rate, above 4.4% can be achieved, depending on additional adjustments – such as a withdrawal rate that is partially tied to market performance or a shorter time horizon.However, withdrawal rates over 5% carry additional risks and require special planning.

StrategicPoint believes that a safe retirement income withdrawal rate is one that allows no more than a 10% chance of your running out of money. This means that 90% of the time, you will die with a balance in your investment accounts. A 90% success rate is tolerable, because we assume that your available retirement assets do not include your primary residence. This exclusion provides a buffer in the event of unusual market volatility.

Based on recent literature and experience, StrategicPoint recommends the following initial retirement income withdrawal rates for those concerned about the ultimate safety of their portfolios: Conservative investors: 4%; Balanced and Growth investors: 4.4%.

Special situations: Since every client’s retirement is unique, exceptions to the above general guidance can exist. For example:

Increasing the withdrawal rate to 5% is possible if you are willing to adjust your spending to reflect changes in the market. This means that in down market years you would forego inflation adjustments. Or you might plan to reduce discretionary spending as you get older (Caveat! This only works reliably if you have long-term care insurance). The onus of responsibility is on you to make these cash flow adjustments work.
A reduced rate of less than 4% may be advised if you would like to leave a legacy to charity or heirs; if your retirement is expected to last longer than the assumed thirty years; or if your risk tolerance is low.
A withdrawal rate of more than 5% is possible under special circumstances such as: if you have a shortened life expectancy, anticipate an inheritance, or are able to downsize your primary residence. Investing more aggressively can statistically help maintain a higher withdrawal rate; however, it can also dramatically shorten the life of your portfolio in a down market.

StrategicPoint Working with You

Your withdrawal rate depends on your personal circumstances and risk tolerance. It is important that you work closely with your StrategicPoint advisor, on an ongoing basis, to ensure that you maintain a realistic and sustainable withdrawal strategy.