After working hard for decades and carefully saving for retirement, you would surely not want to be out of money and be forced to look for some job at this age. That’s the reason why you need to have a solid after-retirement plan. Moreover, this is where the knowledge about the Sustainable Withdrawal Rate (SWR) can help you to curate a safe, secured & comfortable future after retirement.
Determining the Safe Withdrawal Rate for a secured future
Planning for your retirement needs a careful strategy. You must not only be aware of how to save correctly but also of how much you should spend annually. This way you can ensure that your money won’t fall short while your days still count. This is called the Sustainable Withdrawal method of spending. Figuring out how much money you can safely withdraw each year, is a great way to plan the golden years of your life.
Is 4% withdrawal good enough for retirement?
You must have already come across this thumb rule of withdrawal if you are making retirement plans. Proposed by the prominent financial adviser William Bengen, the 4% rule for a safe withdrawal rate is an approach, especially in premature retirement days, to help retirees prevent running out of their savings.
Supported by data and facts, studies also prove the dependability of this method. The Trinity Study analyzed the history of stock markets from 1926 to1995. The aim was to decide on a safe withdrawal rate for average retirement portfolios.
The research showed that the average rate for a safe annual withdrawal was 4%. The portfolios used for this study were formed up of 50% stocks and 50% bonds. It means that if one retired at any point in the 30-year between 1926 to 1995, their savings would have delivered a 100% success rate. In such a case, you wouldn’t have to worry about your money running out. Even modest expenses of living increments each year wouldn’t have affected your situation.
The reliability of this method
This Study by Trinity was revised in 2014 and the outcomes were similar to the previous results. This means that the rule still holds up and is reliable. However, according to some expert opinions, counting on constant data in this rapidly changing time may not be the best thing one should do.
Since bonds and other modes of fixed-income investments present a lower rate of returns, a withdrawal rate of 4% could be too expensive. Thus, they suggest a 3% withdrawal rate in order to make your portfolio serve longer.
Yet, it wouldn’t be wrong to say that a 4 or 3% guideline is a decent rate. It can easily help calculate a safe sum that you can withdraw yearly after your retirement.
Factors that can affect your Safe & Sustainable Withdrawal Rate
Applying the 4% sustainable withdrawal rate method is a good strategy to pre-plan your retirement. However, there are a lot of factors that can influence your Sustainable Withdrawal Rate.
✔️ Financial situation
Your personal financial situation plays an important role. It determines how much your reserved fund can spare each year. The Trinity study majorly follows 50% stock and 50% bond-based portfolios. But, suppose your portfolio is more conventionally bound, then it can lower your chances of getting success with a 4% withdrawal rate.
✔️ The span of your retirement time
Similar to your financial condition, the span of your retirement period can greatly affect your success rate. While the Trinity study only covered a period of 30-years, you can have a longer or shorter retirement stretch. The longer the duration will be, the more you will have to save. More importantly, the less you will have to spend each year in order to last long.
✔️ Other sources of income and their types
While assessing your sustainable withdrawal rate, you will need to also consider your other sources of income. For example, having a tax-deferred retirement account will make you pay taxes on your withdrawals, eventually subsiding your spending strength. This may force you to raise your withdrawal rate to wrap your bills or find additional means of income to fill voids.
On the other hand, if you possess additional sources of income, such as a pension, then you will be able to decrease your yearly spending and live comfortably by withdrawing money at a rate of less than 4%.
Considering all the points mentioned above before you start a new chapter of your life, will help you ensure a stable future for yourself. Moreover, educating yourself on such financial matters can also be helpful for your friends and family members.