Mike Palmer in Kiplinger: What is the Right Retirement Withdrawal Strategy?
If you're like alot of our clients, you've done a good job saving and investing for retirement. But planning for the transition from living off a paycheck to living off your retirement nest egg can be intimidating. That's why choosing the right retirement withdrawal strategy is crucial. While there's no one-size-fits-all approach, understanding various methods can help you make an informed decision.
What is Sequence of Return Risk?
Before diving into specific strategies, it's important to acknowledge two unpredictable factors that can impact your retirement plan:
- Sequence of portfolio returns, especially early in retirement
- Future tax rates
While most investors know the long term annualized return of stocks is in the 9-11% range, that journey is a bumpy road with some years realizing double-digit negative returns. In fact, for the 30-year period ending in 2024, the S&P 500 averaged 10.9% -- however the calendar year return only fell within +/- 2% of the average return two times during that 30-year stretch! What if you had retired at the end of 1999? The next three years the S&P 500 returned -9%, -12% and -22%. That's sequence of return risk!
This underscores the need for flexibility in your retirement planning. For instance, tax rates can significantly affect your withdrawals. A married couple with $200,000 of taxable income eight years ago paid an effective tax rate of 21%. Today, the same inflation-adjusted income ($262,000) is taxed at just 19%, resulting in more than $5,000 in savings. In the next decade, the tax pendulum could swing back in the other direction … or not.
What is Monte Carlo Probability?
Most financial planners use Monte Carlo software to help quantify the chances someone will outlive their money. Using historical asset class returns and volatility allows mathematical modeling to forecast a range of possible outcomes. When stress-testing a portfolio, most financial advisers view a Monte Carlo probability of success score of 80% or higher as satisfactory. Some people desire a higher level of security, while others are willing to trade off a lower success probability with spending more early in retirement when they can enjoy it.
Our Kiplinger article (Which of These Four Withdrawal Strategies is Right For You?) explores four popular retirement withdrawal strategies:
- Fixed Real Withdrawal Strategy (The 4% Rule)
- Guardrails Strategy
- Retirement Smile Spending Strategy
- Partial Liability Driven Investment (LDI) Strategy
Choosing the right retirement withdrawal strategy is a personal decision that depends on your unique financial situation, risk tolerance, and lifestyle goals. While these strategies provide a framework, it's crucial to remember that retirement planning is not a set-it-and-forget-it proposition. Regular reviews and adjustments are necessary to ensure your strategy remains aligned with your needs and market conditions. At Ark Royal Wealth Management we've helped hundreds of people just like you navigate the complexities of retirement. Give us a call if you'd like to learn how we can help you!