Safe Withdrawal Rate
If you are not familiar with the term “Safe Withdrawal Rate” you should be. Its the key factor to guide you in determining how much money you can withdrawal from your savings each year once you reach retirement. Nobody wants to run out of money. So using this guideline will help you significantly.
The problem is the number is likely much lower than you were expecting … and financial planners are far too often not advising their clients until its too late.
The Safe Withdrawal Rate (feel free to google it) is a conservative approach to retirement income that balances having enough money to live comfortably but ensure you do not run out of money before you run out of life. The suggested rate is 3 – 4%, often called the 4% rule, meaning for every million dollars of savings you have you are only able to withdraw $30,000 to $40,000 a year.
Why so low? Determining the appropriate amount to withdraw from your savings is difficult because there are so many unknown variables. How will stock and real estate markets perform? How will inflation affect the purchasing power of my money? Will there be additional expenses such as medical costs? How long does the money need to last ie) life expectancy?
The safe withdrawal rate method tries to prevent these worst-case scenarios from happening by instructing retirees to take out only a small percentage of their portfolio each year, typically 3% to 4%. Financial experts recommended safe withdrawal rates have changed over the years as experience has illustrated what really works and what doesn’t work and why.
This planning methodology is not without its limitations. Actual economic conditions can be vastly different in 10 or 20 years from now. For example, the government debt as a result of Covid-19 spending might mean much higher taxation rates and or inflation.
There is a solution. You just need a better built plan. One that creates an income of 7 to 8% of your savings.