Consider These 4 Things When Deciding Your Retirement Withdrawal Rate

Today, I want to talk about four things. I think you should consider when it comes to withdrawal rates from your investments in retirement. But first I want to introduce myself. My name is Warren Burger. I'm the owner of Luminary Financial Advisors. And we work with people that are within five years of retiring or recent retirees to create a customized retirement plan within emphasis on tax planning. So let's start with this whole idea of a retirement withdrawal rate and why that even came to be and why we think about that. And so I think this first became popularized by a, a paper that was written in 1994 by bill bein, who was a financial advisor at the time. And basically he had done a series of studies looking at what would be the safe withdrawal rate for retirees, that they wouldn't deplete their investments over the course of their retirement.

So he came up with these, the 4% rule, which you, you may have heard about in the past. And essentially what that says is that if a retiree takes four per starts with a withdrawal rate of 4% per year and then increases that withdrawal rate for inflation each year, they would be able to go 30 years and be safe from having depleted their investment accounts. And, and the way he did this is he looked at rolling 30 year periods from 1926 all the way up to 1994. And he found with, even with the great depression the.com bubble 2008 crisis, that a retiree would've been able to sustain their investments throughout that 30 year period. There were a few caveats to that. One is that the person would be assumed to be having their investments in 50% stock portfolio, 50% bond portfolio that you would be taking increases for inflation. So for instance, if the first year you have a million dollars, the first year, you would take out $40,000 for that year. If the inflation rate was 2% and the following year you would be taking out $40,800 and so on.

So this is where this concept really came from, and it was the idea that people were and, and financial planners and, and things like that were, so this became this really

So this became this widely used rule of thumb that financial planners used individuals were using as a start to make sure that they didn't run out of money and their retirement. And what's been found over the years, is that while it's an interesting rule of thumb, but the fact is that everyone's situation is different. And so the, while this may have been a good rule of thumb and frankly, while it makes sure that you don't completely deplete all of your funds through retirement, it doesn't take into account the fact that you may have a different asset allocation of your investments. You may have different taxation implications of your investments. So there's a few flaws in the plan and it may not apply to every individual, but let's talk about these four things that you need to consider when you start to think about this withdrawal rate.

So, number one, what is the age at which you're thinking about retiring? And the reason that this has an impact on the withdrawal rate is that obviously the younger you are, the more conservative that withdrawal rate would have to be. If you're not planning on working, we're increasing those investments over time. So we're going on the premise that, Hey, I'm retiring. I'm gonna be living off of these assets. There's been a big movement over the last few years called fire, which stands for financial independence retire early. The premise of which is that people will live below their means, invest prudently and look to have financial independence at an earlier age. And some of these people are looking to retire in their forties. In which case you have to look at a lower withdrawal rate, because the fact is it's going to have to sustain you for that much longer.

So some bands that I've generally used over time with clients include for someone in their forties, really looking at probably a 3% withdrawal rate someone that's retiring in their fifties. We might look at something closer to three and a half percent to 4%, and then someone in their sixties, you know, we could be looking at anywhere from five to 6%, depending on some of these other factors that I'm gonna discuss as well. So age is really important because the older you are, the more time you've had to make investments, the less time to deplete those investments. And so you can be less conservative. The next thing to consider is what are your goals? What are your, what are the vision and values that you have for your future for your family? Couple of good examples. I had one husband and wife.

They had felt as though they had contributed to their children paid for a college really put them in a, in a situation where they had the rest of their lives to succeed. And so they didn't feel as though they were looking to leave anything when they passed for their children specifically it was fairly well understood that their house at the end would be passed to their children and whatever, whatever else that was left over would go to them. But there wasn't a specific idea that, Hey, we want to leave this legacy for children. We want to enjoy our retirement and spend it. And so for those people, we were a little less conservative in our initial estimates because we saw that they had sort of these goals that did not include leaving something at the end. Whereas I've had another couple that I've worked with and I'm working with now.

They really felt like they came from a situation where they've built themselves up and they weren't in a position where they had inherited wealth. And they've worked really hard to build up what they believe is going to be a legacy for their children. And it was really struck by the gentleman that I was dealing with, who said that, you know, he wants to build generational wealth for his children. And he said to me, you know, rich people they've done it for years and years. Why can't I, and you know, my response was, of course you can but it's really about trade offs. So for them, as they're getting into retirement, we're gonna be slightly more conservative with their withdrawal rates, because we are really trying to also plan for this legacy that they want to leave for their children and their children's children.

Neither one of these is better or worse than the other. These are just personal preferences, but depending on what your specific goals are, we need to sort of tailor that withdrawal rate around those goals. So the third thing that we have to think about when it comes to the withdrawal rate is what are your other income sources? So social security is gonna come up at some point but is there a pension, are there expected inheritances that might be coming? Things like that, you know, that can really have an impact on what our assumptions are going to be on that initial withdrawal rate. And so, you know, ultimately what you're looking at is, Hey, what are these goals? What are they gonna cost us? What is the guaranteed income we can expect from social security, pensions, things like that. And, and then the difference is really what you're gonna be taking from investments.

So depending on the need, you might be slightly more conservative with your withdrawal percentage because you may have less of those guaranteed funds coming in than someone else who may have a, a pension or a higher level of social security relative to the goals and how much their intention is on spending. I sometimes find myself trying to get people to give themselves permission, to actually use more, because there's such a fear that they're gonna run outta money, that they, they actually will deny themselves what I, what I believe could be a more prosperous retirement just based on the fact that they have those assets that are available. And if we can project with a certain degree of certainty, and there is no certainty in life, but we can, we can, we can get pretty close. Then why not? Why not enjoy your retirement? Why not do these things, these bucket list items that you've always wanted to do.

So I'm always, if we can get there, I'm always encouraging that to happen. So the fourth and final consideration that I think is probably the most important out of all of these is how willing are you to be flexible? So what we do with our clients is we build flexibility into the plan. And so we don't, we, we may start at a specific withdrawal rate. And usually that comes off the back of us having done a really in depth analysis and projections of what we think their retirement is gonna be, rather than just a, you know, starting out with an estimate, but in all of our plans, we build in flexibility. So what does that mean? Well, just like your life changed up to and including retirement. So is your retirement going to change? So why not adapt to changing circumstances? If we can make sure that you have a standard of living, that's a sort of a minimum based standard of living that you're enjoying your retirement, then we can make adjustments, which means that we might have in one year higher withdrawal rate, because the markets have been doing well for a while, where that happens to be the year that you want to buy that RV that you've always been wanting, or maybe there's a, a personal family emergency, and there's more funds that are needed in that particular year.

Then you're gonna have a much higher withdrawal rate than we may have initially started with we're willing to make adjustments, which means that, yeah, we can, we can take more money in that given year, as long as we're willing to understand that if we have a, a, a, a longer term situations or downturns in the market, we may want to do some minor adjustments to the income that you're having in a given year to make sure that we are being dynamic in the way that we look at our retirement spending. To me, that just makes sense. And that's how we advise our clients, but it doesn't mean that it's right. Some people want to a higher degree of certainty. They want to feel as though, okay, this is what my withdrawal rate is. I'm really not looking to deviate from that. So I want something that's gonna be safe that I can depend on.

Now, it's unlikely. You won't have to make at least some adjustments, but you can limit the amount of adjustments that you make. But what that does apply is that you're probably going to take a more conservative withdrawal rate to make sure that you don't have to make these on the fly adjustments through your retirement. And that's okay. That's what makes all of our experiences in retirement, different from each other. Everyone is going to be slightly different than the other. And so I come back to this idea of people wanting to know what is the correct withdrawal rate, and the fact there's, there is no correct withdrawal rate. There is just the ability to project what you think your retirement is going to look like, and then make adjustments along the way, or going another route and going with a much more conservative view of your withdrawal strategy, so that you can have a degree of certainty.

That's more than say that idea of making these sort of dynamic adjustments. So those were the four things that I think are most important when it comes to trying to figure out your withdrawal rate. When you start retirement, I hope that you enjoyed the video. If you have, please subscribe to the channel and share this video with anybody that you think might benefit. I also have a number of free resources below if you check those out links to some PDFs and some flow charts and checklists on retirement things that might be helpful for you as you're trying to think your way through some of these issues that come up. I also have a link to my personal calendar. If you ever feel as though you want another set of O on your retirement situation, please feel free to reach out. We can have a complimentary conversation. If I'm not necessarily someone that you're gonna work with in the future, I'll at least make sure that you get steered in the right direction. Thank you. And I hope to see you again,