The Sad Truth About Retirement Withdraw Rates
There has been much research conducted on the recommended withdrawal rate from a nest egg once in retirement. Most research points to a maximum acceptable annual withdrawal level of between 4%-5% of net financial assets (excluding primary residence). We generally recommend a maximum of 4.5%. Obviously, the less one draws from their assets the better their chances of never running out of money.
Many people entering retirement are surprised by this 4.5% withdrawal rate guidance. After all, a monthly cash flow of $3,750 sounds like a pretty meager sum for every $1m in retirement assets. Unfortunately, longer life expectancies and continually rising cost of goods have made longevity risk a major concern for today’s retirees.
Why do we recommend such low retirement draw rates? The reason is that retirement portfolios must continue to grow over time in order to maintain purchasing power. Most people in retirement will draw a portion of their assets out every year to live (withdrawal rate). After draws, a portfolio must grow (net of taxes and expenses) at least with the rate of inflation in order to preserve real purchasing power.
When viewed this way, it is very clear the need to put away enough assets while in the accumulation phase of life to ensure retirement success. In order to actually increase real wealth, a portfolio must grow in excess of the sum of the rate of withdrawal, inflation, taxes, and investment expenses…a tall order indeed.
Source: Maxim Global Wealth Advisors, By Andrew Fisher, CFA, CPA – 2008