What are the Safer Withdrawal Rates for a Retired Person living on savings?
There was a time when a thumb rule was applied to find out what amount you can withdraw from a retirement account every year. However, with changing dynamics and lifestyles, the considerations have changed and we may atleast say that there is no rule of thumb for what amount you can withdraw from your account if you are living on savings after retirement.
There was a 4 per cent rule earlier, which was coined by William P Bengem in 1994 and it suggested that anyone retiring can withdraw 4% of their money from retirement account and deal with the inflation and other parameters comfortably thereafter, for atleast 30 years or so.
When it comes to retirement, the most important and relevant question is, ‘How much money do I need to save’? The question is not easy to be answered. Every other individual has different requirement and conditions and not all theories may apply to all. Therefore, there is always a need for a standard rate of withdrawal that should be based on future market returns.
One of the safest withdrawal methods is to use dynamic strategy while changing your withdrawal rates every year, based on your specific needs and the direction of the market. At the same time, we may also assume that 4 per cent strategy works well too, but then, it depends from case to case.
The strategy of adjusting your withdrawal rates based on market performance every year is considered to be a more dynamic approach and accepted widely. A report says that if you withdraw 3.8 per cent initially, you would still have a 15 per cent possibility of running out with the money in next thirty years.
Alternatively, you can set a fixed percentage; let’s say 4 per cent annually, whatever the case may be. The investor keeps the withdrawal rates constant thereby leaving a room for adjustment with changing rates of the market. However, this kind of approach is linked highly to the performance of the market and thus may conflict with your spending habits.
Another workable approach is to maintain a diversified portfolio. This will help you to spend the money which is generated by appreciation, which means that any price gains over bonds and stocks would directly mean a surplus amount to be spent and limit the budget with it.
The best way, as all say is to remain flexible when you are living on savings. Even 4 per cent could be quite low for you and the best approach is to find your convenience and draw a balanced line when it comes to withdrawals.
At the same time, it is true that women tend to live longer than the men and thus they should have a lower withdrawal rate than men. So that is one crucial factor to keep in mind. Last but not the least, whatever percentage you fix for your annual withdrawal, it would somewhere come near 4 per cent and by the end of the day, you would know its true and it’s applicable.