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How much can I withdraw in retirement?

How much can I withdraw in retirement?

May 14, 2019
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Ever since William Bendgen's article, "Determining Withdrawal Rates Using Historical Data" appeared in the October 1994 issue of the Journal of Financial Planning, advisors have been utilizing this study to guide clients on how much they can comfortably withdrawal from their investments portfolios during their retirement years. In essence, the rule states that individuals should not withdraw more than 4% of their retirement savings annually, adjusted for inflation, to give them a reasonable probability that their investments will sustain them through a 30-year retirement life expectancy.
 
This assumes that the average retiree withdrawals a similar, inflation adjusted, amount from their retirement accounts each year. However, recent studies have shown that retiree behavior is not consistent with that assumption. Does that change the outlook and advice that clients should be receiving?  A 2013 study, The Drawdown of Personal Retirement Assets, found that only 17% of retirees made any annual withdrawals from their retirement accounts between the ages of 60 and 69 years old. (Remember that starting at age 70 1/2, investors have to start taking required minimum distribution 's from their IRA and retirement plan accounts.)
 
Even after investors have to start taking their required distributions, there is ample evidence that this is at least partly done to comply with tax law, not due to income needs. After nearly two decades of being retired, about 1/3 of retirees had more in investment assets than they did when they started retirement. Those who were blessed to have strong income sources such as defined benefit pensions, tended to draw down even less from their investment accounts.
 
If retirees are not following the spending strategy laid out in the 4% rule, how are they deciding how much to draw down from their assets each year? There are likely a number of financial, familial and emotional issues that are driving their behaviors. These could include wanting to leave an inheritance or legacy to their family. It could also be driven by a fear of running out of money before running out of life. This is increasingly true as advances in medicine have increased life expectancies over the years, especially for those who have the means to access the health care they need. We also find that some clients are hesitant to flip the switch and spend the money they have accumulated after many years of saving and investing for the future.
 
What do I believe these studies tell us?  It tells us that your financial and cash flow needs are unique to YOU.  It points to the need for personal financial planning, guidance and advice.  As I have said for years, a financial plan should be like a custom-made suit. It does not matter if it fits anyone else, it needs to fit you, your goals and your family's situation. If you have friends or family that are struggling through these questions and uncertainties as they face their retirement years, please let them know that we are happy to help as they navigate towards their idea of retirement success. As always, we appreciate and value our relationships with you, our trusted clients and friends, as we continue "Moving Life Forward" together.