“There Is No Iron-Clad Rule for Withdrawal Rates”

Scott Burns recently wrote an article at his Asset Builder web site titled The Safe Withdrawal Rate May Be Changing.

Juicy Excerpt #1: There is no iron-clad rule for withdrawal rates. All the rules-of-thumb that you see discussed are based on probability studies of how long different portfolios will last at different rates of withdrawal. If you retire at age 65 the odds are with you for a withdrawal rate of 4 to 5 percent. If you are younger than that, or come from a long-lived family, you should make withdrawals at the low end of that range. If you are older than that or have a shorter than average life expectancy, you can withdraw toward the higher end of the range.

Juicy Excerpt #2: Another thing to remember is that all these probability studies were done in periods where interest rates and stock dividend yields were considerably higher. For instance, the yield on a 50/50 portfolio of S&P 500 index stocks and 5 year Treasury obligations is under 2 percent today. In 2000 the same portfolio provided a yield of 3.65 percent and in 1990 it provided a yield of 5.99 percent. You can read more about this on my website under “portfolio survival.”

The difference in current yield is important because every dime of withdrawal that doesn’t come from current interest and dividend income must come from principal. So in 1990 you could withdraw 6 percent and not touch your principal. If you did that today you’d be taking 4 percent of your principal each year. That’s a formula to go broke well before you die.