Have you ever wondered, “How much can I live on in retirement and be reasonably assured I will have enough money for life?” Of course you have. This is the second-highest reason given by our clients for engaging us.
The technical term for this is “safe withdrawal rates.” It will come as no surprise to you that we spend a lot of time keeping up on the latest research and continually refining our thinking around withdrawal rates.
Just this month I attended three workshops conducted by the nation’s leading experts in withdrawal rates. While we currently use Money Guide Pro as our primary software to establish our rates, we are in the process of building a spreadsheet to test those withdrawal rates as a type of “second opinion” originating from the latest research.
The simplistic, yet tried and true, rule of thumb I’ve used is 3%. Based on all the new research, a person still can’t go wrong with this estimate. However, using a 3% withdrawal rate has a high probability you will “leave some money on the table” that could have gone to supporting your life in a little better style. Finding that perfect balance between spending enough to enjoy life to the fullest without running out is at best an art, certainly not a science, and involves a good dose of luck.
Many, many variables affect withdrawal rates. Every time we change our investment mix (like adding the DFA portfolios) it changes our standard deviations, which in turn affect withdrawal rates. We historically have used a cost of living estimate for Social Security that was even with our long-term projected increase for the Consumer Price Index (CPI), which is 3%. With some of the turmoil and lack of confidence that Congress will put Social Security on a firm footing without some type of crisis, we lowered our COLA expectations to 1% under the CPI, or 2%. Of course, this affects your withdrawal rate.
As a result of our ongoing tweaking and refining, you will see some fluctuation in what we believe may be the best withdrawal rate for you. Most of these fluctuations are very minor and rarely exceed 5% in either direction.
In the case where you withdraw significantly less than our calculations show you could, there is no effect. In the case where you are withdrawing at or greater than the maximum we show, there may be some impact. In most cases, the impact is to lower the probability of “having enough.” Only you can decide if you feel most comfortable with a probability of having enough of 99% (a high chance of leaving money on the table), 95%, 80% or even (gulp!) 50%.
At the end of the day, a projected withdrawal rate is just that, a projection. It’s an educated guess, given everything we know, as to what you can withdraw from your portfolio. Markets change, economies change, and unplanned events happen in life. All of those will affect your portfolio and withdrawal rates, some positively and some negatively.
While we can’t promise or make guarantees about what life may throw your way, we can promise you that we are in your corner and constantly assessing the latest thinking and research and how it applies to your withdrawal rate.