You worked hard for decades and dreamt about retirement—and that day is finally here. There are so many things on your bucket list: travel the world, live in a foreign place, take classes, and most importantly, enjoy retirement to the fullest. But the fear of the unknown is keeping you up at night; how much can you safely spend to not risk running out of money early?
One common retirement withdrawal strategy is the “4% withdrawal rule.” This rule says you can withdraw 4% from your savings each year, adjusting this rate for inflation, and amazingly, your portfolio will last for 30 years. (Applies to a hypothetical portfolio invested 50% in stocks and 50% in bonds.) While the 4% rule does provide some protection and a good place to start, most retirees require more complex planning; relying solely on this rule could leave savers with a shortfall or unwanted surplus later in retirement.
As we dig deeper into the 4% rule, let us explore several important caveats to it.
Be mindful of market conditions—don’t forget about those deep recession years: 2001/dotcom bubble, 2008-09/financial crisis, and 2020/COVID-19 pandemic. It is not a good idea to spend more from your portfolio during market down years. If you can be flexible, making a few sacrifices, like lowering non-essential spending, this can increase the likelihood that your money will last. Conversely, splurging when the market does well may still lead to a high level of success. Again, stay flexible, because as you know, nothing ever goes exactly as planned.
Other Income Sources
Make sure to factor in other income sources—Social Security benefits, pension, annuity income, LTC, or other non-portfolio income—in determining your annual spending. For example, if you retire early at age 60, you may want/need more money to spend on active activities, whether it is traveling or gifting to family/charities. Why limit yourself to only 4%? We believe it often makes more sense to spend more than 4% in the early years if you have several other income sources coming in later.
As people age, their spending patterns change. There are three phases of retirement: the go-go years, the slow-go years, and the no-go years. Your spending habits will change vastly throughout these three phases. In the go-go years, you may want to spend 7% when you are healthy and able to enjoy your money, then bring it down to 3% in the slow-go years because you are getting older and your joints are starting to ache. In the last phase, the no-go years, you have done everything on your bucket list and are now volunteering at a local shelter. Although most expenses have come down in this last phase, medical costs will increase, so your spending rate might jump up to 6%.
As you can see from the points above, your life is dynamic/unpredictable and will need a more careful approach than the simple 4% rule. Remember, stay flexible and assess your plan regularly. If the market performs poorly, be prepared to make a few sacrifices, and spend less. If the market does well, you may be more inclined to go for that dream vacation in Italy.
Important Disclosure Information:
Different types of investments involve varying degrees of risk, including the risk of loss of your entire investment. Past performance is not indicative of future results. CPWM and its employees can give no assurance that the performance of any specific investment recommendation or investment strategy discussed herein, whether directly or indirectly, will be profitable, or that it will be equal to any historical performance level discussed herein. The discussion or information contained herein is not intended to be, and should not be deemed as, personalized investment advice. The recommendations made may not be suitable for your specific individual situation and we encourage you to discuss with your financial professional before undertaking any investment strategy or recommendation contained herein. The discussions contained in this blog is current only as of the date hereof and may change due to a number of factors, including varying market conditions.