By Larry Van Quathem, CFP®
One of the biggest worries for anyone approaching or living in retirement is running out of money. After years of careful saving and investing, the challenge shifts from accumulation to making your savings last—an often-overlooked process called decumulation.
Decumulation isn’t simply taking a set percentage of your assets each year. It’s utilizing smart withdrawal strategies to maintain your lifestyle while also shielding your nest egg from market swings and unexpected costs.
This article explores sustainable withdrawal strategies designed to provide a reliable income throughout retirement, helping you enjoy your years with confidence and peace.
The 4% Rule: A Starting Point, Not a Silver Bullet
The 4% rule has been a widely accepted guideline for retirement withdrawals for a long time. According to this guideline, retirees can take out 4% of their initial retirement portfolio balance in the first year. In later years, they can alter that amount for inflation.
The 4% rule provides a straightforward foundation, but it’s important to understand that it has limitations and isn’t a panacea. Its appropriateness for certain retirees can be influenced by a number of factors, including:
- Longevity: Since people are living longer, their savings may need to survive for more than 30 years.
- Market volatility: Even with a moderate withdrawal rate, a portfolio can be severely depleted by sequence of returns risk, which involves experiencing large market downturns early in retirement.
- Inflation: Unexpectedly high inflation can reduce fixed withdrawals’ purchasing power.
- Personal circumstances: Spending requirements, medical expenses, and other financial commitments might differ significantly from person to person.
Therefore, even though it can be a useful starting point for discussions, depending solely on the 4% rule without taking specific circumstances and market dynamics into account can be a problematic strategy.
Beyond the 4% Rule: Exploring Sustainable Alternatives
Retirees should investigate more flexible and dynamic withdrawal strategies to manage the challenges of retirement income planning:
- Guardrails method: The 4% rule is expanded upon in this strategy by adding “guardrails,” or thresholds, that cause the withdrawal rate to change in response to portfolio performance. For example, a somewhat bigger withdrawal is allowed if the portfolio balance is substantially above a particular threshold. Conversely, withdrawals are curtailed to safeguard capital if the balance falls below a preset threshold.
- Variable percentage withdrawal (VPW): VPW entails determining the annual maximum sustainable withdrawal based on the retiree’s remaining life expectancy and the present balance of their portfolio. This method allows for larger withdrawals in years with robust market performance and requires smaller withdrawals during downturns.
- Time segmentation (bucket strategy): This strategy involves splitting retirement funds into several “buckets” according to risk tolerance and time horizon. Liquid assets for short-term income demands are kept in a short-term bucket; more cautious investments for the following 5 to 10 years are kept in a mid-term bucket; and growth-oriented assets are kept in a long-term bucket. To provide the longer-term assets the chance to grow and replace the shorter-term money, withdrawals are mostly made from the short-term bucket.
- Actuarial-based withdrawal strategies: By using mortality tables and actuarial science, these more advanced techniques calculate a withdrawal rate that is likely to endure throughout the retiree’s anticipated lifespan. These tactics can be customized by a financial professional to fit each person’s risk tolerance and life expectancy.
Integrating Tax Planning and Healthcare Costs
Now let’s take a look at the effects of taxes and medical costs on sustainable withdrawal strategies.
Proactive tax planning is crucial since taxes have the potential to drastically erode retirement income. Tax liabilities can be reduced with the use of strategies like Roth conversions, tax-efficient asset allocation, and careful management of required minimum distributions (RMDs).
Similarly, medical costs represent a significant and often unpredictable expense in retirement. Incorporating potential healthcare expenses into your withdrawal plan and exploring strategies like health savings accounts (HSAs) and long-term care insurance can help you feel confident that your retirement income can remain sustainable even despite health-related costs.
Partner With a Professional to Build Withdrawal Strategies You Can Rely On
Outliving your savings is a real concern for many retirees, but it doesn’t have to be a reality for you. With careful planning and smart withdrawal strategies, you can enjoy a comfortable retirement.
At ABLE Financial Group, we’re dedicated to providing trusted guidance and personalized service tailored to your unique needs. I’m committed to putting my clients’ best interests first and helping them pursue financial stability. To learn more about our team and the ways we can help guide you, call 480.258.6104 or email adam@ablefinancialgroup.com today.
About Larry
Larry Van Quathem is Senior Financial Advisor at ABLE Financial Group, a financial services practice that focuses on transition planning and simplifying the complexities of their clients’ wealth. Larry is an Arizona native who grew up in the financial services industry, as his father, Bob, became a Financial Consultant for Merrill Lynch when Larry was just seven years old. After earning a Bachelor of Science in Finance from the University of Arizona in 1993, Larry followed in his father’s footsteps just two years later. They worked together for more than a decade before Bob retired in 2009, and after gaining 20 years of experience at Merrill Lynch, Larry joined ABLE Financial Group in 2015. He saw it as a great opportunity to increase the quality of service for his clients and to have more control over how that service is delivered..
As a CERTIFIED FINANCIAL PLANNER® professional, Larry excels at listening to each client’s personal goals and offers tailored approaches to help achieve those goals using a written plan of action. He creates a personalized service model for every client, serving as a financial coach working with corporate executives, and a deep knowledge of the college planning landscape.
Larry is actively involved in the community, currently serving on the Board of Governors for the Boys and Girls Club of Scottsdale. His past community service includes serving on the Board of Delta Sigma Pi Leadership Foundation, the Board of Directors for the Association for Supportive Childcare and being a past active member of the Scottsdale 20-30 club. Professionally, Larry has been a member of the Central Arizona Estate Planning Council since 2010.
Residing in Phoenix with his son Jake, Larry enjoys golf in his leisure time. He also shares his home with his French Bulldogs, Rocky and Birdie.
