Ask Bob: What’s a Good Withdrawal Rate?

Robert Powell, CFP®

Question

I constantly read retirement info/data relating to individuals who are 65 or at their designated Social Security age. I am 78-years-old and continue to work full time as well as contribute 18% to my 401(k).

I realize the withdrawal rate recommended for age 65 is 4-6% (depending on the amount saved), however, I don’t believe enough has been said to those who are working beyond age 65 like myself. In today’s environment, working beyond 65 is almost routine. I do consider my family generic history and the ages of my parents when they passed. My father was 92 and my mother 102 and I am in good health aside from the usual age-related arthritis and slightly elevated sugar levels.

I would appreciate any positive feedback for a person beyond the retirement age of 65 with respect to any adjusted withdrawal rates from retirement savings of approximately $500,000.

Answer

First off, there is nothing magic about 65, says Mark Edwards, a senior adjunct faculty member at California Lutheran University.

The same retirement logic applies regardless of age – the only difference for those over 70 is the need to deal with qualified fund required minimum distribution (RMDs) and Social Security, he says.

The RMD issue for those still working is complex, and requires a review of all funds that one may have set up (especially if outside of the current employer). “For this, I suggest that you talk to a qualified tax professional,” says Edwards. “I am assuming that you are also receiving Social Security benefits; while you aren’t required to take them at any age, delaying past 70 will not increase your benefit (beyond COLA).”

The 4% rule comes with some assumptions, says Edwards

One, the initial withdrawal rate is 4% of your financial asset’s principal at retirement,

Two, withdrawals grow with inflation each year,

Three, the assumed horizon is 30 years, and

Four, the portfolio is rebalanced to 50% stocks and 50% bonds each year (and that returns match historic returns).

Moreover, says Edwards, the rule doesn’t consider taxes (which would reduce the ‘spendable’ portion of your withdrawal).

On the positive side, Edwards says 4% was based on the worst 30-year scenario since 1929, i.e., funds ran out before the end of 30 years. “Relaxing any of the assumptions - say reducing the horizon to 20 years, not increasing withdrawals after negative years in the market, or allowing for a 10% chance that funds run out - will lead to a higher initial withdrawal rate,” he says.

The starting point when determining how much you can withdraw during retirement, says Edwards, is your budget and your plans after retirement. “There is an assumption that retirees spend the first 10 years ‘playing,’ resulting in higher expenses than planned due to travel and other leisure activities that offset any reductions in ‘work’ expenses,” he says. “Eventually leisure starts to shrink and expenses often drop – at least until or unless health care costs intervene. This is where having a plan to deal with the unforeseen (either long-term care insurance or an alternative source of liquidity to cover potential expenses) becomes vital.”

Once you have created a realistic budget (allow for some fun – you’ve earned it! But also allow for unplanned contingencies beyond health care such as home repairs or that self-driving car that you are yearning for), subtract any ‘outside’ income sources such as Social Security, annuities, pensions, and ‘other’ sources like rental income, royalties, etc. “Any residual shortfall is the amount that your savings will need to cover,” he says.

The most important variable in all of this is, of course, how long you expect to live, says Edwards. “A 78-year-old woman can be expected to live between another 13 and 14 years,” he says. “This is the median; given your healthy attitude towards work and life, I’m assuming that 20 years isn’t a stretch.”

According to Edwards, there are a variety of online calculators that will allow you to determine how much you can withdraw based on your assumptions regarding horizon, rate of return, inflation, and initial amount to spend. Using mycalculators.com, Edwards entered 20 years, 6% return (the higher the percentage allocated to bonds, the lower the return), 3% inflation, and $500,000 as your starting point. The result was a nearly 6.5% initial withdrawal rate that will increase with inflation. Reducing the return to 4% still allows for an initial withdrawal rate of 5.5%.

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