And there's the rub. Looking at the ebb and flow of withdrawals and account balances historically or running Monte Carlo simulations to assess the probability of a good outcome may provide some valuable framing, but making real decisions in real time is a whole other matter. Though the 1918 retiree was technically a success based on the parameters of the study, she was the worst-case scenario and exhausted her funds at the end of 30 years. Her current withdrawal rate therefore had increased to 100%. That's not just unsafe, it is unreal. The 1921 retiree, who sounded like the enviable one of the four retirees described earlier, saw her current withdrawal rate plunge from its initial rate but her initial rate was over 9%. How many of us would have asked a client, "Do you not worry about whether 9% is sustainable?" Unreal.
To some extent we don't have to wonder about how clients would react to adverse markets. I've been advising clients for 20 years. Many want to buy when markets have been good and sell after they have been bad. Like you, I have seen clients loosen their spending in boom times and tighten their belts after busts. Many of our clients retired around the turn of the century and have experienced two brutal bear markets. They are largely at least OK and many are thriving. There are many contributing factors to this, but two stick out to me as I write about current withdrawal rates.
First, we rely on good, solid financial planning, not upon rules of thumb. Second, if we do reference a rule of thumb, we spend considerable time addressing limitations of the rule and even more time managing client expectations. I suspect readers of this publication do similarly.
The answer to the question of whether a current or initial withdrawal rate is too high, or whether it is safe to increase withdrawals because the current withdrawal rate has become so low, is dependent on many factors, most of which are unique to the client. These include life expectancy, tolerance for investment risk, ability and willingness to earn income, capacity to decrease withdrawals, applicable tax rates, and support for other family members to name but a few.
I'd love to provide readers with a handy rule of thumb that says if the current withdrawal rate gets above X percent, the client should reduce their withdrawals or, if the current withdrawal rate gets below Y percent, clients should feel free to increase their withdrawals. Alas, I think this is yet another area within financial planning where "it depends" is the correct answer. Nonetheless, I'll discuss what X and Y should probably be next month.
Dan Moisand, CFP has been featured as one of the America's top independent financial advisors by most leading financial advisor publications. He has spoken to advisor groups on five continents on topics such as managing investments and navigating tax complexities for retirees, retirement readiness, and most topics relating to the development of the financial planning profession. He practices in Melbourne, Florida. You can reach him at 321-253-5400 or [email protected].