The natural starting point for establishing a future withdrawal rate is to understand the withdrawal rates that have been safe in the past. We'll examine those variable withdrawal methods in more detail later in this piece. This is evident in the chart below, which compares the starting real withdrawal rate of five different retirement spending methods with the volatility of their cash flows when analysed across 1,000 simulated retirement spending scenarios. But these variable strategies involve trade-offs-specifically, the year-to-year cash flow can be more volatile. For instance, our research finds that some flexible withdrawal systems would support a nearly 5% starting withdrawal rate. Our research finds that retirees can take a higher starting withdrawal rate and higher lifetime withdrawals by being willing to adjust some of these variables-tolerating a lower success rate or forgoing complete inflation adjustments, for example.Īlternatively, retirees who employ variable withdrawal systems that are based on portfolio performance-taking less in down markets and more in good ones-can significantly enlarge their starting and lifetime withdrawals. Nevertheless, given current conditions, retirees will likely have to reconsider at least some aspects of how they define their "safe" withdrawal rate to make their assets last. That's because the assumptions that underlie the withdrawal-rate calculations-a long time horizon, a fixed real withdrawal system, and high odds of success-are conservative. This should not be interpreted as recommending a withdrawal rate of 3.3%, however. That's what I explored with my colleagues John Rekenthaler and Jeffrey Ptak in " The State of Retirement Income: Safe Withdrawal Rates." Using forward-looking estimates for investment performance and inflation, we estimate that the standard rule of thumb should now be lowered to 3.3% from 4.0%, assuming a balanced portfolio, fixed real withdrawals over a 30-year time horizon, and a 90% probability of success (that is, a high likelihood of not running out of funds over the time horizon).
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