What is a Safe Withdrawal Rate During Retirement?
One of the most pronounced fears for retirees and pre-retirees is outliving their assets. This has especially been a large concern in light of low investment returns over the last decade.
In an effort to provide peace of mind to Beacon clients who are in, or approaching, retirement, Beacon performs a Retirement Feasibility Analysis where we actually "simulate" a retirement period. For more information on this service, feel free to check out the following video: "What is a Retirement Feasibility Analysis."
There have also been many academic studies focusing on withdrawal rates. Here are a few:
The purpose of many of these studies is to provide insight to the question, “Given my preferred asset allocation (Stock/Bond mix), how much money can I safely withdraw from my portfolio on an annual basis such that my portfolio lasts for my lifetime?”
One of the most famous studies, known as the Trinity study, recently updated results to include return information through 2009. Here is a compilation of the findings from the study.
Observations from the Trinity Study:
A 4% withdrawal rate is generally sustainable for most portfolio allocations
The longer your retirement period, the more stock exposure you will likely need
Those with higher withdrawal requirements may need higher stock exposure
Alternatives that may extend the number of years your portfolio will last
While portfolio withdrawal rates are important to consider, it is important to note that there are many variables that can increase the odds that your portfolio will last. Here are a few suggestions to consider:
Rebalance your portfolio. After market downturns it is human nature to invest more conservatively as the market outlook seems overly grim and invest aggressively after a market advance. It is important to maintain an Investment Policy Statement that outlines your target allocation and defines parameters regarding rebalancing your portfolio.
Reduce living expenses. Delaying vacations, new car purchases, home renovations and other unneeded expenses will temporarily reduce the withdrawal need from your portfolio.
Make strategic Social Security decisions. The decision of when to begin collecting Social Security retirement benefits can have a meaningful impact on issues relating to portfolio withdrawals. Making strategic decisions with regards to Social Security in the context of a long term distribution strategy is imperative. Our articles, "Should You Delay Collecting Social Security Benefits" or "Strategic Social Security Decisions to Consider," may provide some insight in this area.
Downsize your house. In general, larger homes cost more than smaller homes. Not only are mortgage costs higher, but maintenance and other ongoing costs tend to also be higher.
Obtain long term care insurance. One of the potentially largest unknown expenses that retirees face is the cost of long term care. Paying a known cost (insurance) to protect against an unknown, and potentially catastrophic expense (long term care) could significantly extend the “life” of your portfolio. "The Basics of Long Term Care Insurance" and "At What Age Should I Obtain Long Term Care Insurance," may be helpful articles to reference.
Delay retiring. You will note in the table above that 20 year retirements can support higher distribution percentages than 30 year retirement periods.
Consider converting your IRA into a Roth IRA. With income tax rates currently at historic lows, converting your IRA into a Roth may prove to be very beneficial in reducing your tax burden in retirement since distributions from Roth IRAs are not taxable (and there are no annual distribution requirements). In our article, "Should You Consider a Roth Conversion," we discuss some of the implications when considering a Roth conversion.
In general, we believe that there truly are no hard and fast rules of thumb that can be counted on when it comes to how long a portfolio will safely last. Instead, we subscribe to the mindset that careful planning, ongoing monitoring and occasional adjusting will result in the highest probability of success
Source: Table is compiled using information from the study
The outcomes are based on varying economic conditions and the historical returns of both stocks and bonds from 1926 to 2009. For each stock/bond mix, the analysis calculates a “Likelihood of Success” which is the probability that a withdrawal rate is sustainable given that allocation.