Facebook Rss Twitter Youtube MSN

Is a 3% withdrawal rate too conservative?

May 14, 2012 | | Comments Comments Off

Question: In a recent column you repeat advice I have often read that withdrawing about 3% of my investment capital will reduce the chances of my running out of money in retirement. But that doesn’t make sense to me. I have been retired for over 19 years and I have sufficient data now to extrapolate that I could live for 100 more years with so meager a drawdown because, through good and bad times, my earnings after inflation and taxes always exceed 3%. If I am missing something, I must be extraordinarily lucky because it hasn’t hurt me yet, and at age 77 I think it unlikely to do so in my remaining years. Can you explain this discrepancy between my experience and the consequences of your advice?

Answer: Sure. You got extraordinarily lucky.

You retired during a massive bull market, which is the best possible scenario for someone who hopes to live off investments. You were drawing from an expanding pool of money. Your stocks probably were growing at an astonishing clip of 20% or more a year for several years. Although later market downturns probably affected your portfolio, those initial years of good returns kept you comfortably ahead of the game.

Contrast that with someone who retires into a bear market. She’s drawing from a shrinking pool of money as her investments swoon. The money she takes out can’t participate in the inevitable rebound, so she loses out on those gains as well. All that dramatically increases the risks that she’ll run out of money before she runs out of breath.

It’s the first five years of retirement that are crucial, according to analyses by mutual fund company T. Rowe Price, which has done extensive research on sustainable withdrawal rates. Bad markets and losses in the first five years after withdrawals begin significantly increase the chances that a person will run out of money during a 30-year retirement.

Some advisors contend that a 3% initial withdrawal rate, adjusted each subsequent year for inflation, is too conservative. If you retire into a long-lasting bull market, it may well be. But none of us knows what the future holds, which is why so many advisors stick with the 3%-to-4% rule.

Related Posts

  • What’s a “safe” withdrawal rate? Dear Liz: After working all out for 28 years in a small business, I have put away $2.6 million in stocks, bonds and some cash. (I am a […]
  • Playing it safe could mean losing money Dear Liz: The certificate of deposit I owned in my Roth IRA recently matured. I've put the money into a Roth passbook account until I can […]
  • Q&A: How to fund a Roth IRA Dear Liz: I have quite a bit invested in stocks in a regular brokerage account. I've held them for many years, and to sell them would mean […]
  • Q&A: Social Security Payouts Dear Liz: My wife and I, 63 and 62, plan to continue working till at least 65. We will begin collecting Social Security benefits in […]

Categories : Investing, Q&A, Retirement