Beware of fiction masquerading as science – particularly in finance.
In retirement planning the quintessential example is the safe withdrawal rate myth.
Everyone needs to know the answer at some point in their lives: How much can you safely spend from your retirement account without running out of money before you run out of life?
Excellent research exists on this subject yet it gets dumbed down by media and other bloggers into an oversimplified 4% Rule. It is a neat, clean, and tidy answer – well researched, simple to understand, and easily actionable.
It has great sales appeal… and it is also dangerously wrong.
Safe Withdrawal Rates Revealed
That is why I just spent the last two weeks researching and writing this article unraveling the truth behind safe withdrawal rates. Seriously – two weeks! That is how important I consider this subject to be for your financial future.
Why would I take that much time on a single article for a subject many of you don’t even know about? Let me explain…
- Critically Important: Because safe withdrawal rates are critically important to you – whether you know it or not. They define how much money you need for retirement and how much money you can spend from savings during retirement. This knowledge can make-or-break your financial security.
- Dangerously Wrong: Because there is a ton of misinformation and dangerous half-truths about this subject. I wanted to dig deep into it so that you had the knowledge you needed to make the right decisions.
Why Safe Withdrawal Rates Are Critically Important To Get Right
A lot of people don’t understand why this information is so critically important so let me explain…
Every new retiree needs an answer to the same question – what is the maximum retirement income I can withdraw from savings without going broke before I die?
It is the single most common question I get from retirees and near retirees.
The reason is because safe withdrawal rates impact every aspect of retirement planning – from the lifestyle you can afford to the amount of savings needed to fund it. Small errors in safe withdrawal rates multiply over many years causing huge financial impacts…
- Lifestyle You Can Afford: Few people realize that a mere 1% safe withdrawal rate change makes a big difference in spending during retirement. It seems counter-intuitive because the number is so small. However, a 1% variation from the industry standard 4% assumption will increase (or decrease) your income in retirement by 25%. That can make the difference between a world traveler lifestyle or living at home on hot dogs. In other words, it pays to calculate your safe withdrawal rate as accurately as possible because small changes equal huge changes in the lifestyle you can afford.
- Savings Required: The amount you can spend each month from savings and the amount of savings you must build to support your retirement are flip-sides of the same coin. One implicates the other mathematically. For example, the “4% safe withdrawal rate” is mathematically equal to the “Rule of 25” (you need 25 times your first year spending in savings). Similarly, a 3% safe withdrawal rate equals roughly 33 times your first year retirement spending in savings. Using the two examples above, a mere 1% change in safe withdrawal rate when spending $100,000 per year in retirement is the difference between building a nest egg equal to $2.5 million vs. $3.3 million – obviously a big deal. Conversely, knowing you can safely spend 6% would knock the savings requirement down to $1.7 million. That’s why it is so important to figure an accurate safe withdrawal rate: It can change the amount you need to save for retirement thus shortening the time it takes for you to reach your financial goals.
- Risk To Financial Security: If you withdraw just 1% more than your actual safe withdrawal rate you will go broke before you die. It is a mathematical truth. A mere 1% less would have allowed your nest egg to last a lifetime. That’s why accuracy is critical – because the razor thin margin between 1% too much and getting it right is literally the difference between poverty and financial security.
Like Goldilocks, there is a sweet spot in retirement spending somewhere between “too much” and “too little” that is “just right”. In an ideal world you would exhaust your last penny from retirement savings as you exhaled your last breath. That is the theoretical objective of safe withdrawal rates.
It is a high-stakes game where the quality of your life during retirement is dependent on getting the answer right. For that reason, there is probably no question more important in retirement planning.
That’s why I spent two weeks writing this article for you explaining how it works.
How Conventional Wisdom Got Safe Withdrawal Rates Wrong
Common sense would dictate that a subject so important would have been well researched.
In fact, the truth is that it is well researched but mass media and casual bloggers have somehow dumbed the conversation down into a dangerous 4% Rule that is not consistent with quality research conclusions. It is dangerous and you need to separate the fact from fiction to make well-informed decisions.
What You Should Do About It
Simple. Read this article.
The only price you pay is time. I’m giving you this knowledge for free.
The price of admission is you just have to care enough to read it and leave a comment. Nothing for sale – no pitch.
The information in this article is critically important to your financial future. It can help you avoid falling prey to the over-simplified, conventional wisdom.
Please leave a comment at the end of the article and let me know how it affected your thinking. Did I achieve my objective? Did it make sense? Did you learn something of value?
I really want to know…
The link to the article is here – Are Safe Withdrawal Rates Really Safe?