Should retirees use a 4% withdrawal rate (from their assets to live on)?
One comment said the following:
I see a flaw in this thinking. There are three components here. The amount of money you need to live your desired lifestyle in retirement, the total amount of assets you have accumulated and what to take from those assets each year to provide your income.
A budget will do no good. If you have insufficient funds, setting a withdrawal rate to support desired spending still must reflect total assets. Too little assets, or too high a withdrawal rate means you may run out of money.
4% taken each year to live on may not be perfect, but it’s a reasonable guide that can be adjusted in retirement.
Let’s say you do your best and accumulate $1,000,000 for retirement. The amount you can take from that $1,000,000 is $40,000. You may add a Social Security benefit to bump your income if you need more than $40,000 or include SS in the $40,000 thus taking less than 4%. If a 4% withdrawal results in excess funds, put the excess in cash reserves and take a little less next year.
If 4% results in insufficient funds to live on, you could take more, say 5%, but that raises the risk of running out of money and is dependent on your investments. I have never seen a recommendation to take above 5% and very few even at 5%.
The more likely strategy is to trim spending. That’s why I say your budget – spending – is driven by your income not the other way around. And also why I say aim for retirement income equal to 100% of your base pay while working even if it generates an excess in the early years of retirement.
Actually, Society if Actuary (and other) studies of retirees, including folks with modest incomes who have been retired 20+ years tend to adjust their spending so that it matches their income, and, when possible, they hold assets for that proverbial rainy day. Many carry over lifelong spending restraint …. But times change and they don’t call the coming wave of boomer bequests the silver tsunami for nothing .
Everyone’s situation is different. My rates of withdrawals vary year to year based on events like planning weddings, repairs to your house, vacations and health. They can range from more than 4% to under based on financial needs of each year. Also a factor is your risk tolerance in investing. Equities should be a bigger part of your base assets than past 30 – 70 mix. For myself a 60 -40 mix has helped maintain my retirement funds (thanks to a bull market).
That seems rather risky, especially taking more for what appear major expenses. If you don’t have a steady withdrawal rate even if you don’t spend it all in a given year, what confidence have you that you will not outlive your funds? If you were living on an annuity, your income would be steady, why not now?