Good to Know
This is the first of three blogs addressing financially dangerous and avoidable retirement mistakes. Today’s focus is upon avoiding excess withdrawal rates from one’s retirement portfolio.
Before we begin, let’s address the common phrase “safe withdrawal rate.” A safe withdrawal rate is a rate that significantly reduces, but may not completely eliminate, the risk of dying before your money dies. “Safe” is generally not “guaranteed.”
The author prefers the term “sustainable rate” over “safe rate.” A sustainable rate balances the need for current year income against the need to preserve the retirement income stream for future years. Candidly, a sustainable rate can be elusive. For example, your client can find astonishingly high (excessive) recommended withdrawal rates in the internet’s digital abyss.
Excessive withdrawal rate recommendations present an opportunity for the savvy advisor. You can lead your client into a discussion deeper than superficial internet “advice.” As but one example of your opportunity, your client should be informed of the key factors in choosing a sustainable withdrawal rate. The key factors include:
- Risk tolerance/portfolio return
- Life expectancy and confidence
- Planning for the unexpected
1 Rotblut and Bengen (2019, December). AAII Journal “Insights on Using the 4% Withdrawal Rate From Its Creator”. Retrieved from https://www.aaii.com/journal/article/insights-on-using-the-withdrawal-rule-fromits-creator
2 A 90% confidence level means that the forecasted results will be achieved 90% of the time.