Video: What is the appropriate withdrawal rate?

by | Dec 7, 2020 | Retirement Planning, Risk Management, Videos

So you work really hard saving money in investment accounts and retirement accounts, and then you come to retire, how much can you take from your portfolio each month? What is the appropriate withdrawal rate?

What is a withdrawal rate? How is this rate decided upon?

You’ve worked really hard all of these years saving money into investment and retirement accounts. When it comes time to retire, how much money can you take off your portfolio each month? This question is talking about the idea of withdrawal rate.

What is withdrawal rate?

What is withdrawal rate? A withdrawal rate is the percentage you take out of the total principle you have. We like to think a safe starting point is a 4% withdrawal per year. An example of this is if you have a million dollars, 4% would be $40,000 dollars per year, or $3,300 per month.

Changing rates of withdrawal

Is the 4% rule only designed to be the absolute most you can ever take off, or are there seasons where you can actually take a little bit more? The 4% rule is just a rule of thumb; I consider it to be a generic rule. As someone gets older they have less years in which they will need to take a withdrawal monthly so you can pull at a little higher rate. On the flipside of this, someone who starts retirement younger may choose a little lower rate to begin with. Again, it’s a rule of thumb, it’s a starting point. We work very hard to get that number right with each of our clients.

How market risk affects withdrawal rate

Another factor is how much market risk you take. We typically talk about a 60/40 traditional portfolio (60% stocks – 40% bonds). If someone wants to be more conservative than that, they certainly can, but it will affect the amount we’re able to take off their portfolio each month.

The 4% number comes from several studies done on the worst point in our market history. In that worst point in market history, to a point today, if you took 4% you were and are able to sustain a balance. This being the driving factor in which generates your income every single month.

There are certain market environments that we could go higher than 4%, but we want to err on the side of caution where we don’t run you out of money. There are a ton of different moving parts in this landscape, if you have any questions or concerns please reach out to us.

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