How Much Can You Safely Withdraw?
How much can you withdraw from your retirement accounts without jeopardizing your retirement?
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Full Transcript below:
00;00;00;00 - 00;00;28;22
Unknown
Welcome back to 30 Minute Money. It's the podcast that delivers action oriented, smart money ideas and bite sized pieces. I'm here with Steve Wershing of Focused Wealth Advisors to do another podcast. Yet another one, yet another podcast in studio. Yes, it's good to be here. It's good that you're here. And, we're going to talk about withdrawing, withdrawing money from retirement.
00;00;28;26 - 00;00;46;12
Unknown
Retirement accounts. Right. Yeah. We're talking like an actually talk. What's how how much can you do safely. That's what we're going to talk about. So they when when when people come into the office for the first time typically the biggest question on their mind is do I have enough to retire? Yeah. And you know, related to that is okay.
00;00;46;12 - 00;01;11;08
Unknown
So how much can I pull from my accounts? How much can I pull out of these accounts and still have enough to get all the way through retirement and, and so you hear here rules of thumb out there about how much you can pull out of your accounts. And I wanted to talk a little bit about what those numbers are, and also talk about some of the, strengths and weaknesses of using those estimates.
00;01;11;08 - 00;01;33;10
Unknown
So let's just start, you know, with the with the highest level number, the most general number. there have been a whole bunch of papers about how much can you safely withdraw from your retirement accounts. There was an early paper that was influential called Retirement Savings choosing a Withdrawal Rate that is Sustainable by Cooley, Hubbard and Wells. and that was published in 1998.
00;01;33;10 - 00;01;54;09
Unknown
It's called the Trinity Study. There have been a bunch of other studies that that have been very similar. And then they come to a similar conclusion, and that is that you can pull safely 4% from your accounts and not get yourself into trouble now. So thanks for joining us. We'll see you next week. No. And that's and that's 4% every year.
00;01;54;12 - 00;02;19;27
Unknown
Is that what you're saying? Yeah. Right. it's 4% total and you have to stop forever now. yes, it's 4%. Don't make fun of me now. you know, I joke about that being all there is because they're the. Obviously, that is not all there is. that's, What what we need to do is we need to drill into those studies and take a look at that.
00;02;19;27 - 00;02;43;29
Unknown
And that doesn't mean that, 4% is the safe rate, that 4% is the rate that you can safely withdraw. assuming that, you know, assuming a worst case scenario. So assuming the panic of 1907, assuming the, the, the downturn of 1929 of, it assumes that you're going to go through, you know, that you're taking out money at the bottom of those things.
00;02;43;29 - 00;03;04;00
Unknown
And so it kind of is a little bit too conservative. So if you look at that and say, oh my gosh, 4%, I'm never going to be able to live on that. Don't worry about it. Because actually the real number that you can do safely is probably somewhat north of that. So, you know, the, the safe withdrawal rate for any.
00;03;04;00 - 00;03;29;12
Unknown
So these studies are based on 30 years of withdrawal. So the assumption is that you retire sometime in your early 60s and that you you know, we want to make sure that you have enough to live in to your early 90s. So that's that's kind of so 30 years is, is what we're looking at. and the average safe withdrawal rate for any particular 30 year timeline for any particular 30 year period differs.
00;03;29;15 - 00;04;03;19
Unknown
But the average actually, safe rate for the for the average of 30 year periods is about 6.5%. So it's considerably it's 50%. More than 4%. 4% is the worst case scenario. more like an average scenario would be more like 6.5%. Although, you know, I, I if if you're pulling out 6.5% and that's all I know about you, I, you know, I might get a little concerned about that because we never know when the worst case scenario is going to is going to pop up.
00;04;03;22 - 00;04;21;10
Unknown
and that that brings us to that, that, you know, that risk that we worry about in that case. And it's called sequence of return risk. And so if you do projections based all on averages, you'll you'll get a starting point for where you want to think about how much money you can pull out. But no one year is is average on average.
00;04;21;10 - 00;04;44;17
Unknown
No year is average. So, you know, so we have to worry about what the real world is. And the real world is that, you know, stock markets do different things in different years. Bond markets do different things. Inflation does different things. And there's a really big difference between retiring and having the market go up 20% versus retiring and having the market go down 20%, they can be very different outcomes.
00;04;44;19 - 00;05;21;18
Unknown
And so that sequence of returns risk is one of those reasons why those studies look more like 4% as opposed to 6.5%. But the chances are what you can safely do is is is comfortably above, a comfortably above that 4%. so you've got sequence of returns risk. you've also got inflation risk. So if you're thinking about how much can you pull out per year, don't forget that if you want to keep up with your expenses, whatever that 4% is, you're going to need that to go up a little bit every year because if you don't, then ten years, 20 years into retirement, what you were pulling out before is not going to
00;05;21;18 - 00;05;45;06
Unknown
pay the bills that it was when you first retired. So that's got to be figured into there somewhere. The, one kind of new technique that's kind of interesting, a new planning technique that's, you know, relatively new is not to just talk about that strict withdrawal rate, but to, but to set up guardrails for spending. And so the guardrails are based on a safe withdrawal rate, but they're adjusted every year.
00;05;45;08 - 00;06;03;26
Unknown
And basically it says, you know, if you can pull out whatever you you're thinking of pulling out, as long as your portfolio doesn't drop below this level, which would be the lower guardrail, then you're okay. And if it does, if it, no, I'm sorry. If you're spending goes below that lower guardrail, then you're just simply not spending enough.
00;06;03;27 - 00;06;25;02
Unknown
You're you're artificially, denying yourself a lifestyle that you should be to lean. Yeah. And if your portfolio goes, you know, goes the other way above the upper guardrail. Well, then we need to, you know, potentially cut things back a little bit. So rather than just a single, a single statistic per year, you know we've got a range because you know the markets are going to go up and down.
00;06;25;02 - 00;06;46;23
Unknown
Spending is going to go up and down. All kinds of things are going to go up and down. And so charting out that guardrails approach actually is kind of interesting and a lot easier to relate to than just picking a particular number and sticking dogmatically to that because that's, that's, that's a little bit too, too limiting. That's kind of what I was thinking too, because everybody's different and there's so many different things going on.
00;06;46;24 - 00;07;06;26
Unknown
And right to come up with that kind of a number is really exactly kind of scary, actually. And, you know, I think things will you know, there are years when you're going to want to spend more and years when you're going to want to spend less. And, you know, that brings up the idea of one of the things that we should consider is spending patterns in retirement, because, you know, they've been studying this now for a while.
00;07;07;02 - 00;07;29;13
Unknown
And one of the one of the things that they realize is that, you know, you may need this much to support your lifestyle when you retire, but that's going to change, right? You're spending is not going to stay consistent through retirement. When you first retire, you're probably going to travel a lot more. So if you retire in your mid 60s, you're probably going to do a whole lot more travel than when you're in your mid 80s, right, or late 80s.
00;07;29;13 - 00;07;56;27
Unknown
Right. And so, you know, you're probably going to play a lot more golf when you're in your 60s than when in your 80s. So just having that one number gets, you know, is a little bit too constraining. It's not it's not terribly nuanced. One of the other things that that, you know, that we do when we do financial plans is we'll, we'll do a projection for somebody about how much do they need to keep the household expenses paid, and then what are their other goals?
00;07;56;27 - 00;08;16;11
Unknown
How often do they want to take vacations? How often are they going to replace their car? How often are they going to have to replace major things in their house? And we make those all separate goals so that we can, you know, so that we can map them out individually. and most people, you know, most of the people who come see us, they have enough to do most of the things that they want.
00;08;16;13 - 00;08;43;15
Unknown
But we also run another kind of scenario that we call maximum spend. And so we'll do that, that first projection and take a look at the likelihood that that's going to work. But then what we'll do is we'll start pushing up those household expenses until until the probability of succeeding falls to a certain acceptable threshold. That's a lot more useful because if you say, well, to do all these things I want to do, I'm going to need, you know, I'm going to need $75,000 per year coming in.
00;08;43;18 - 00;09;08;25
Unknown
And if I say, great, you know, prior probability of succeeding with that is about 99%. So that's terrific. But that that's not terribly useful. But if I start pushing that number up until the probability of success drops to a minimum acceptable threshold, and I say, okay, that's that number ends up being $93,000. Now that's useful because now we can say you can afford 75, you can afford 76, you could afford 80.
00;09;08;27 - 00;09;26;09
Unknown
We really start worrying about it when you get closer to, you know, low 90s. Now I've got practical information that I can use. So that's why, you know, how much can you safely take out? Having a statistic like that is a good starting point. It's a good rule of thumb, but you can get a whole lot more sophisticated than that.
00;09;26;12 - 00;09;53;16
Unknown
And that's why ultimately the best approach is to map everything out. And this is what a good financial planner will do for you is to map out what are your sources of income, what are your different kinds of expenses, you know, based on where you're getting it from, what are your taxes going to be? And we can lay all that stuff out so because in the end, you know, all of those rules of thumb, all of those guidelines, we've talked about this, about how much do I need to retire on other episodes.
00;09;53;18 - 00;10;12;23
Unknown
It's not terribly useful because it's all really personalized, but mapping it all out, that's what's going to be a whole lot more useful. So, you know, you can start at 4% or you can start at 6.5%. But really, if you want to know how much you can withdraw, what you want to look at is what are your sources of income, what are your resources?
00;10;12;23 - 00;10;26;20
Unknown
What are your different kinds of expenses? What things do you want to be able to do, and to sort of map all that stuff out, to see what happens over the course of time and see what the likelihood is that you'll succeed at it.
00;10;26;22 - 00;11;01;16
Unknown
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00;11;22;29 - 00;11;52;12
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00;11;52;14 - 00;12;20;12
Unknown
And what's your 30 minute action item? How much will you need to withdraw for a retirement? Lot more than I thought. 30 minute money. I always have to get that last little jab in that last little ridiculous. Maybe not this yourself, but 30 minute money three zero minute top money is where you can find the podcast, and we would love for you to share with your friends and rate and review the podcast on the platform that you're listening to us on.
00;12;20;14 - 00;12;41;13
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