It isn’t hard to find an article that discusses Safe Withdrawal rates, but I am not exactly sure why it is such a hot topic in retirement planning.  Investopedia provides a pretty succinct definition of the Safe Withdrawal Rate (which they refer to as the 4% rule),

What Does Four Percent Rule Mean?

A rule of thumb used to determine the amount of funds to withdraw from a retirement account each year. The four percent rule seeks to provide a steady stream of funds to the retiree, while also keeping an account balance that will allow funds to be withdrawn for a number of years. The 4% rate is considered to be a “safe” rate, with the withdrawals consisting primarily of interest and dividends. The withdraw rate is kept constant, though it can be increased to keep pace with inflation.

Investopedia explains Four Percent Rule

The four percent rule helps financial planners and retirees set a portfolio’s withdrawal rate. Life expectancy plays and important role in determining if this rate is going to be sustainable, as retirees who live longer will need their portfolios to last a longer period of time and medical costs and other expenses can increase as the retiree ages.

I believe that for the most part safe withdrawal rates are simply academic at best and misleading at worst.

The “rule” comes from a set of studies that were performed in the late 90’s commonly referred to as the Trinity Study.  It was hypothesized that with a proper allocation of bonds and stocks that a portfolio can withstand a 4% withdrawal rate (with increasing withdrawals for inflation) without crashing the portfolio.

Since that time additional back tests have provided different but similar results…so why do I think they are all worthless? Because it isn’t real life!

Retirement Income is What You Need

Lets says we have the normal American “dream” of retiring at 65 and saving up so your investable assets are $1,000,000.  You spend a normal $50,000 or $60,000 a year are you all of sudden only going to spend $40,000 because that is what some paper said is possible? Retirement is not a switch on your living expenses.

Granted this example is purposefully simplistic; maybe there will be be Social Security or a pension to cover the short fall.  But it is more likely than not you won’t have that $1,000,000 in investable assets, because comparatively speaking a $1,000,000 is still a lot of money.  My back of the napkin math in the linked article says about 92% of people do not have that kind of net worth…so that 4% withdrawal rate becomes much more “real” when we are talking about investable assets of $500,000 or $250,000 which only allows for a yearly withdrawal of $20,000 and $10,000, respectively.

If I had $500,000 in investable assets and I am retiring it is likely that I will do a mix of drawing down principal and cutting living expenses which is why I believe safe withdrawal rates are nothing but academic.  They allow near retirees, not actual retirees, and financial planners sleep better at night.

Am I all gloom and doom? No Way! There are millions of Americans who are retired who figure it all out.  Humans in general usually figure out a way how to survive.  In fact this type of discussion actually provides me hope that not everyone has to attain such a huge goal to be able to live.