Choosing a Retirement Withdrawal Strategy for ROL
What’s the right balance between enjoying your wealth in retirement and making sure your nest egg lasts all the way through retirement?
To answer that question, many seniors turn to a number: 4%. But as many of the assumptions about both personal longevity and economic stability continue to change, longstanding assumptions about spending and withdrawal rates in retirement are changing as well.
Each of these three withdrawal strategies can be useful in preparing a successful retirement spending plan. But is any one of them comprehensive enough to improve your confidence about your retirement and your ROL?
The 4% Rule
In 1994, financial advisor William Bengen performed a comprehensive analysis of market history and tested various withdrawal rates from a portfolio with a typical mix of stocks and bonds. Bengen concluded that a withdrawal rate of 4% per year would have kept a senior from running out of money during a 30-year-period, even as the economy experienced some significant ups and downs from year to year. Many advisors and soon-to-be retirees still use The 4% Rule as a starting point for calculating annual withdrawal rates and testing the long-term feasibility of a retirement plan. And recently, Bengen revised his rule by suggesting that a more broadly diversified portfolio might be able to sustain a 5% withdrawal rate.
While the simplicity of a single number and a steady, predictable withdrawal rate is appealing, a typical retirement isn’t static. As your needs and goals change in the decades ahead, and as market returns fluctuate annually, you need a plan that’s capable of adapting with you.
Go ahead and use The 4% Rule for some back-of-the-napkin math. But don’t plan your retirement around withdrawing the same percentage every single year.
Establishing Guardrails
In 2006, financial planner Jonathan Guyton and professor William Klinger proposed five rules that should trigger adjustments to retirement withdrawal rates:
Initial withdrawal rate:2%-5.6% for almost all retirees.
Upper guardrail: If your portfolio is up and your withdrawal rate falls 20% below your initial withdrawal rate, increase dollar withdrawals by 10%.
Lower guardrail: If your portfolio is down and your withdrawal rate rises 20% above your initial withdrawal rate, decrease withdrawals by 10%.
Inflation adjustments: Up to a 6% annual withdrawal increase.
Longevity: Remove the lower guardrail if you project less than 15 years of retirement remaining.
Guardrails are a more proactive approach to setting withdrawal limits and reacting to the markets than relying on a static percentage. But this strategy is also aimed at maintaining a relatively flat withdrawal rate. Strictly following guardrails could also trigger significant tax consequences during up years, or cripple a retiree’s spending power during down years.
The Bucket Strategy
Rather than focusing a withdrawal strategy on market performance, a Bucket Strategy segments your assets based on when you’ll use them in retirement.
One common arrangement might look like:
Early Retirement: Cash, pension income, withdrawals from taxable brokerage accounts.
Middle Retirement: Withdrawals from tax-deferred traditional IRAs and 401(k)s.
Late Retirement: Withdrawals from a tax-exempt Roth IRA and claiming full Social Security benefits.
Retirees might also create Buckets for specific needs and goals, such as relocating, travel, or paying for long-term medical care later in retirement.
Developing Your Strategy for Your Retirement
Somewhere in this mix of percentages, guardrails, buckets, conventional wisdom, market history, and rules of thumb is a personal, adaptable withdrawal strategy that will allow you to live your dream retirement for decades to come.
That’s where Life-Centered Planning comes in. Our process doesn’t start with numbers or rules. It starts with you.
Schedule an appointment and let’s work on a plan that will keep your goals at the center of your retirement!
Disclaimer:
The information provided in this blog is for educational purposes only and should not be considered financial advice. Please consult a qualified financial advisor to discuss your specific situation and needs. Past performance does not indicate future results, and all investments carry risks, including potential loss of principal. Any financial product or strategy references are purely illustrative and should not be construed as endorsements or recommendations.
Investment advisory services offered through Kingsview Wealth Management, LLC (“KWM”), an SEC Registered Investment Adviser. Insurance products and services are offered and sold through Kingsview Trust and Insurance Services (“KTI”), by individually licensed and appointed insurance agents. KWM and KTI are subsidiaries of Kingsview Partners. KWM is an investment adviser registered with the Securities and Exchange Commission (“SEC”).
