If you’ve studied about withdrawing an income from your investment accounts, you’ve likely encountered the “safe” withdrawal rate.
The annual percentage of your total investments that you take out of your portfolio is called the withdrawal rate. This rate is important because it impacts how long your savings may last. If your withdrawal rate is too high, you may run out of money sooner than expected. If it is too low, you may not be enjoying your retirement as much as you could.
The safe withdrawal rate of 4% was first articulated by William Bengen, a retired financial advisor. It is often used as a rule of thumb for withdrawal rates from retirement savings, and is based on historical data to statistically determine what would have been safe given the actual results of a portfolio of U.S. stocks and government bonds given the variables provided.
The safe withdrawal rate has changed over the years. Prior to the Great Recession, we were hearing of safe withdrawal rates of 5 and 6 percent. Needless to say, if you had planned your retirement with those withdrawal rates, you were in for a disappointment.
The safe withdrawal rate also assumes that you will be living on the same withdrawal percentage during your entire retirement. In reality, most retirees spend more money early in retirement. And, the same withdrawal percentage does not necessarily mean the same monthly income. When account balances go down, the monthly payment goes down also, even if the withdrawal rate remains at 4%.
A financial plan for retirement will take your desired spending variables into consideration. By using a Monte Carlo simulation you can determine the possibility that your plan will be successful in multiple scenarios. The MC simulation calculates possible outcomes over and over, hundreds and thousands of times, to simulate a multitude of investment returns throughout the years.
In this way, you can gain confidence in deciding to retire, in enjoying your retirement, and in planning for your money to last as long as you do. I encourage you to plan today!