{"id":199,"date":"2019-01-15T08:07:21","date_gmt":"2019-01-15T08:07:21","guid":{"rendered":"http:\/\/retirementhangout.com\/?p=199"},"modified":"2019-01-19T19:15:33","modified_gmt":"2019-01-19T19:15:33","slug":"managing-money-in-retirement-how-much-can-i-withdraw","status":"publish","type":"post","link":"https:\/\/retirementhangout.com\/index.php\/2019\/01\/15\/managing-money-in-retirement-how-much-can-i-withdraw\/","title":{"rendered":"Managing Money in Retirement I: How Much Can I Withdraw?"},"content":{"rendered":"\n

Welcome back, and Happy New Year! <\/p>\n\n\n\n

My first posts covered how much to save for retirement.  In the next several posts, I explore how to manage savings and withdrawals once you\u2019re in retirement. <\/p>\n\n\n\n

OK, so you\u2019ve made the break, attended your last office party, and are no longer punching a clock.  How should you handle your savings?  How much can you withdraw and spend every year?  Wait a minute, you say \u2013 didn\u2019t the last couple of blogs already answer that question?  Why not withdraw 4% of your savings in the first year, then increase that with inflation each year to keep the purchasing power the same?<\/p>\n\n\n\n

Well, you would most likely do fine taking such an approach, which would have worked out anytime in the last hundred years or so.  But there are some other possible strategies to consider, some of which may be even better \u2013 or may help you sleep better at night.  Let\u2019s take a deeper dive into the whole area of retirement distributions.<\/p>\n\n\n\n

Sustainable Withdrawals<\/strong><\/p>\n\n\n\n

There are two schools of thought about retirement finance.  One is the probability-based <\/em><\/strong>approach, which attempts to define a sustainable (or safe) withdrawal rate<\/em> (SWR)<\/em><\/strong>.<\/em>  This is the approach pioneered by William Bengen, and elaborated by a number of subsequent analysts, that resulted in the 4% rule. <\/p>\n\n\n\n

The graph below shows an updated version of Bengen’s 4% analysis, done by Michael Kitces, that shows the very different sustained withdrawal rates that would have worked beginning in different years from 1871 to the present.<\/p>\n\n\n\n

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Source: Nerd’s Eye View – Michael Kitces<\/figcaption><\/figure>\n\n\n\n

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4% withdrawals would have worked out in the very worst years (late 1960s), and higher withdrawal rates would have been fine in many other retirement years. Still, as some critics have noted, the fact that the 4% rule would have worked in the past doesn\u2019t mean it will necessarily always work going forward.  A good track record is not a guarantee. <\/p>\n\n\n\n

Also, the use of the 4% rule doesn\u2019t take account of how your portfolio is actually doing.  If you have a number of years of bad returns early in your retirement, it might be prudent to scale back your withdrawals.  This is probably what most retirees would actually do if faced with this situation. <\/p>\n\n\n\n

On the other hand, if you\u2019re in your eighties and your investments have done well, you might be able to take more out than the rule suggests.  In most past periods, the 4% rule would have resulted in a tidy ending balance \u2013 good if your goal is to leave a legacy, but not so good if you would have preferred to spend some of that money on foreign travel or other adventures on your bucket list. <\/p>\n\n\n\n

In short, locking in a withdrawal amount without regard to the current status of your portfolio doesn\u2019t seem ideal.  So the 4% rule is a great guide to saving for retirement \u2013 but may have some shortcomings as a withdrawal strategy. <\/p>\n\n\n\n

Safety First \u2013 Another Approach<\/strong><\/p>\n\n\n\n

A second body of research on retirement, the safety first <\/em><\/strong>approach, is rooted in Lifecycle Finance Theory, <\/em>associated with the work of economist Franco Modigliani in the 1950s, and more recently, Professor Zvie Bodie of Boston University.  The lifecycle hypothesis states that people will attempt to achieve a relatively constant standard of living throughout their lives, saving during their productive working years and dissaving (i.e., spending!) in retirement, as shown in the diagram below.  The theory predicts that a worker will save for retirement rather than buy that shiny Maserati now and live in a pup tent and eat spam later. <\/p>\n\n\n\n

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Source: Economicshelp.org<\/figcaption><\/figure>\n\n\n\n

In Modern Retirement Theory<\/em>, a relatively recent application of this approach, Jason Branning and M. Ray Grubbs define funding priorities for retiree spending, from highest to lowest priority:<\/p>\n\n\n\n