One of the most challenging areas for advisors and investors is to know how much one can safely withdraw from their accounts in retirement without running out of money later. The question is difficult because markets can be unpredictable in the short term and we also don’t know at what age we will live until. Most of the information that’s in the popular money related articles refers to the rule of thumb of a 4% withdrawal rate as considered “safe”; meaning if you withdraw only 4% of your account value, no matter what markets you face when you first retire, you are not likely to run out of money.
Recently, I was very excited to come across an article that discussed market history with reference to the 4% rule of thumb. A trustworthy source, Michael Kitces, CFP discussed a study that showed the actual market performance year by year since 1870 with a balanced portfolio (60% stock & 40% bond) and a 4% withdrawal rate. As predicted, he found it was exceptionally rare the retiree finished with less than what they started with at the end of the thirty-year period if you withdrew only 4%. "There was only a small number of wealth paths that finished below the starting principal." More surprising was that in two thirds of the scenarios, the retiree finished with more than double their net worth assuming a 4% withdrawal rate. (Michael Kitces, www.kitces.com) The article went on to say, based on historical year by year market returns for a 60/40 portfolio, assuming a 4% annual withdrawal rate, your wealth would more than likely increase five times in value after thirty years than to finish with less than your starting principal!
So why does the media and at times advisors rely on the 4% rule of thumb? According to this article, the 4% rule is built for environments that have severe bear markets in the first part of retirement. The article went on to suggest if we assume averages, then the safe withdrawal rate would be over 6%.
Here at the Investment House, we understand there is no way to predict market cycles; hence we rely on income from your portfolio as well as appreciation. Currently, most of our balanced portfolios are creating an income of about 5% in the form of dividends and income from bonds. When asked how much we think you can take from your account and not run out of money, we believe a 6 to 7% withdrawal rate is reasonable. (Of course, there are no guarantees and past performance does not indicate future performance.)
Please click the link (http://wiba.iheart.com/media/play/27198137/) to hear more about this topic. Also remember to tune in to “Straight Talk from the House” every Tuesday morning at 8:20 a.m. or visit our website (www.tantoninvestmenthouse.com) for archived programs.
Whether you’re looking to be conservative or aggressive with your withdrawal rates, we look forward to helping you in all market cycles.
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