What's the magic number for client withdrawal rates? Various research has long pointed to around 4%, but research in recent years has nudged that rate to higher levels. At a presentation at last month's national conference for the National Association of Personal Financial Advisors, Jonathan Guyton said a 6% withdrawal rate is appropriate even after the wreckage from last year's financial tsunami. 

Guyton, a principal at Cornerstone Wealth Advisors in Edina, Minn., posited five years ago that initial withdrawal rates of 5.8% to 6.2% can sustain a portfolio for 40 years (though it depends on the equity allocation, and it also means following a few rules, such as not boosting withdrawals after a year of negative returns). During his presentation, he said his updated research now pegs the initial rate at 5.2% to 5.5%.
Guyton told the conference there are two ways to set withdrawal rates. The first entails taking out the same amount each year-increased by inflation-no matter what happened the prior year. "When you look at that version, you'll always be fine if you start between 4% and 4.5%," he said.

The second allows for midcourse corrections in withdrawal amounts if they are triggered by some event, for example, when the current year's withdrawal rate rises more than 20% above the initial rate. That can happen in down markets because withdrawal rates rise on a percentage basis when the overall portfolio takes a hit. In that scenario, withdrawals are cut 10% to preserve capital, which becomes the basis for determining the next year's withdrawal amount. "If you allow for these midcourse adjustments," Guyton said, "you have more options than just a raise that's equal to inflation. It's those options that can raise the sustainable withdrawal rate between 0.5% to 1%."

For an existing withdrawal rate of, say, 5.5%, that could mean an adjusted rate of 6.5%. "A rate of 6.5% is fine when the market valuation is in the bottom quintile of historical valuations" such as during the recent market bottom, Guyton said. But he added that the market's rapid rise since early March has boosted its valuation, thus lowering the safe withdrawal rate back to 6%. He said this rate applies to anyone with a 30- to 40-year withdrawal horizon.