Withdrawal ‘Symptoms’

I was asked recently about the so-called “4% rule.” That’s the rule of thumb that many financial advisors rely on as a formula for how much money can be withdrawn from retirement savings every year (generally adjusted for inflation) without running out of money. (Certified financial planner William P. Bengen is frequently credited with developing the concept, based on his article, “Determining Withdrawal Rates Using Historical Data,” published in the October 1994 issue of the Journal of Financial Planning.) Of course, like so many of our assumptions about retirement, that withdrawal rule of thumb has drawn additional scrutiny, especially in the aftermath of the 2008 financial crisis. At the time, my comment was that the 4% guideline is just that — a guideline. What’s not as clear is whether adhering to that guideline produces an income stream in retirement that will be enough to live on. How much are people actually withdrawing from their retirement accounts? At a recent EBRI Policy Forum, Craig Copeland, senior research associate at EBRI, explained that the median IRA individual withdrawal rates amounted to 5.5% of their balance in 2010, though he noted that those 71 or older (when required minimum distributions kick in) were much more likely to be withdrawing at a rate of 3% to 5% (in 2008, that group’s median withdrawal rate was 7.2%, but in 2010, it was 5.2%). These findings were based on activity among the 14.85 million accounts and $1 trillion in assets contained in the EBRI IRA Database — roughly one-fifth of both owners and assets in the IRA universe. (The agenda, presentation materials, and a recording of the May Policy Forum are available here, and Dr. Copeland’s presentation is here.) Will these drawdown rates create a problem down the road? Will these individuals run short of funds in retirement? At its core, once you stipulate certain assumptions about the length of retirement, portfolio mix/returns and inflation, guidelines like the 4% “rule” are really just a mathematical exercise. However, trying to live on the resources you actually have available in retirement is reality — and those post-retirement withdrawal decisions are generally easier to make when you’ve made good decisions pre-retirement.