Welcome to today’s topic:
Safe Withdrawal Rate In Retirement – The Infinite Money Stream Rule?
Safe Withdrawal Rate In Retirement – The Infinite Money Stream Rule
Safe Withdrawal Rate (SWR) also called the Trinity Studies is the most conservative rate of the money you can withdraw from your portfolio and spend without worrying about running out of money in the future.
This method is being used mostly by retirees in order to track down how much they should be spending on their yearly budget.
If you’re already retired, you probably have heard about this concept.
- Assuming you have a $100,000 portfolio at the beginning of the year.
- You withdraw $7,000 over the course of the year.
- Then your withdrawal rate is 7% ($7,000/$100,000).
How Much Do I Need
To For Infinite Paychecks?
So, how much do you need to make sure that your “paychecks” will infinitely sustain your budget as a retiree?
This depends but not limited to the following factors:
- The risk level of your investments
- Performance of your investments
- Fluctuations in inflation rates (Consumer Price Index =CPI)
- Your desired yearly budget
- Your expected period of retirement (Life expectancy)
Over the decades, studies show that the safe withdrawal rate is between 3-4.5% (4% average).
Let’s make a simple computation.
If your desired yearly budget is between $30,000-$45,000 ($40,000 average) each year, then a $1,000,000 is the amount you need in your portfolio at the beginning of your retirement.
So, if you need a double budget of $60,000-$90,000 ($80,000 average), then you need $2,000,000 in your portfolio and so on.
I’m Not Retired Yet,
How Can I Use SWR?
If you are not retired yet, you can use the SWR method by tracking your approximate rate when you retire.
This will most probably give you the idea of how much you need to be having in your portfolio when you retire according to your dream lifestyle as a retiree.
Therefore, you also can evaluate if you are saving enough with regards to the lifestyle you dream of in your retirement years.
Conversely, some people or groups of people are dreaming of extremely early retirement. Using this method can determine whether or not you already have enough funds in your portfolio to retire extremely early.
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Advantages of Tracking Your SWR
- To evaluate if your current savings and contributions meet your desired lifestyle when you retire.
- To make sure that your money will last throughout your retirement.
- To evaluate if your current withdrawal rate is within the safe withdrawal rate of your portfolio size.
- Serves as your asset protection from becoming depleted from a high withdrawal rate.
- Peace of mind as a retiree.
Infinite Money Stream
Can you really have an infinite flow of money using only your portfolio? Can you really make sure that you will never run out of money after retirement?
The short answer is no. There’s no 100% sure in this world.
However, using the safe withdrawal rate will bring you to the least probability of running out of money throughout your retirement.
Since the future is undetermined and unpredictable, you would want to keep your SWR as low as possible and adjust it every year in consideration of the CPI rate (Consumer Price Index).
Probability of Failure under 4% Rule. $1,000,000 initial portfolio, $40,000 initial withdrawal, Fees=0.05%, Retirement cohorts 1871-1966. Source: cFIREsim.com.
As a general rule, using a 4% SWR+PCI is great for people over 65 years old as the probability of failure is very online at 2-3%. Assuming the 30 years of retirement period is enough.
Well, you will then reach 95 years of age and you still have the portfolio which your immediate family can inherit or you can begin to use it gradually for yourself according to your life expectancy.
However, if you are on the extremely early retirement and your expected retirement years is more than 50 years, you may want to lower your SWR to 3%, as the probability of failure increases after 50 years.
Failure rates under 4% Rule. $1,000,000 initial portfolio, $40,000 initial withdrawal, Fees=0.05%, Retirement cohorts 1871-1966. Source: cFIREsim.com.
In the event that you are at your 30s and decided to go for the extremely early retirement, 65 years of retirement period can be expected. So, you would want to lower your risk of running out of money along the way.
Nope, there’s no 100% sure that you can set up an infinite portfolio but a probability of success at 97-98% at the 4% SWR plus PCI adjustment will bring you to your safest zone if you’re at your 60s.
On the other hand, you may want to lower your SWR to 3%+CPI adjustments, if you are on extremely early retirement with an expected retirement period of more than 50 years to put a portfolio of the safest zone.
Conclusion
Safe Withdrawal Rate (SWR) is very important to everyone whether or not you are a retiree at the age of ’60s or ’30s.
Ultimately, SWR is not less important for those who are still in the active work lifestyle as you can approximate your SWR and evaluate if your contributions to your retirement funds.
However, the SWR method is great but it also has its own limitations.
There is no method that can assure a 100% risk-free portfolio since the future is undetermined and can not be predicted.
Fortunately, according to my research, own evaluation and computations, using an SWR of 4% alone will not be enough to ensure an infinite flow of money in your portfolio as much as possible.
There are other methods like the POF (probability of Failure), life expectancy and CPI rate adjustments that can be combined with the SWR method. A yearly adjustment is highly recommended in order to keep yourself in the safest zone.
As the bottom line, a bigger portfolio with a lower SWR plus PCI yearly dynamic adjustment according to your life expectancy (retirement period) is the safest method in my humble opinion.
This is the end of today’s topic “Safe Withdrawal Rate In Retirement – The Infinite Money Stream Rule?”. I hope you have learned something from this particular matter and that it would help you to make wiser decisions for your personal finances and retirement plans.
This post aims to inspire you to take more actions in improving your personal finances. However, we highly recommend talking to your financial advisor for the actual investment plans that suit your current financial status.
If you have any suggestion or question, please feel free to comment below. Thanks and good luck to your journey to financial freedom.
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