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Let's Talk Retirement Withdrawal Rates

Years ago, I was quoted in Newsweek as having said, "If you can't get by on the wise 4 percent withdrawal rate [from your retirement nest egg], you should have a serious talk with yourself and your spouse about your priorities, trade-offs and aspirations."  While it's certainly nice being mentioned in a national magazine, the material I contributed to the article had nothing to do with withdrawal rates from retirement portfolios, and financial planning rules of thumb are next to useless.

Doing retirement projections properly requires taking into account a wide variety of both quantitative and qualitative inputs.  What's your vision of an ideal retirement?  Will you work part-time?  What's your health history?  Do you have pensions?  Will your employer contribute to retirement medical expenses?  Would you like to leave a bequest or pay for your grandkids' education?  What about a reverse mortgage or long-term care insurance? and on and on.  We find that it typically takes a lengthy discussion just to cover all these bases before the calculation process even starts.

The question we seek to answer for our retirement planning clients is: what probability do you have of successfully funding your retirement given a variety of assumptions and scenarios?  Other researchers/writers/advisors approach the retirement planning problem from another angle: what annual withdrawal rate from a retirement nest egg is sustainable over a given, say 30-year, retirement?  While 4% is frequently offered as a rule of thumb in this case, there is research to suggest that 6% or even higher is realistic.  On the other hand, given that we may well be in a low-return market environment moving forward, 4% may be a stretch.  Regardless, we prefer to tailor a given nest egg to a desired retirement lifestyle rather than crimp a standard of living to match pre-ordained retirement assets.