Rethinking Retirement  

Safe Withdrawal Rate

What is a "Safe" Withdrawal Rate?

One of the most important questions any of us must decide as we prepare for retirement is, "How much can I withdraw from my retirement savings accounts without depleting the balances and risk running out of money?" Whether you're already retired, in the final stages of preparing to retire, or a decade or more away, understanding how much income your accumulated investment assets can generate is critical to your long-term planning.

Like so many things in the financial world, there's a quick answer that will likely satisfy 80% of the population, and then there's a detailed answer, that will be debated by the other 20%. In this article we'll give you both the quick answer, and an answer that is sure to be debated by many. We'll also provide some supporting detail to help you understand where that answer comes from.

When coming up with a Safe Withdrawal Rate (SWR) we have to make a couple of assumptions. First, we assume that you don't know exactly how long you'll live, and because of that, you would prefer not to draw down your assets. With these assumptions, it is clear that you will not consume every last dime you have and therefore there will be something left over when you die. Potentially, a very large something. Some of you will be distressed by this idea, but most will agree that the alternative - outliving your money - is a far worse outcome.

We also need to point out that your age is a huge factor in determining your SWR. It probably goes without saying that if you're 100+ years old, you can afford to safely withdraw a greater percentage than if you're 55 years old. With that being said, the next assumption we'll make is that you want your savings to last a minimum of 15 years and perhaps up to 40 years or more.

The quick answer then, according to many financial advisors, is 4%. From a planning perspective, based on that rule of thumb, every $100,000 of accumulated assets will produce $4,000 of annual income. Therefore if you need $40,000 per year of income from investments you'll need to accumulate $1,000,000 in investment assets. (10 x $4000 = $40,000, therefore 10 x $100,000 = $1,000,000.)

Said another way, for every $1,000 per month of income that you need, you'll need $300,000 of investment assets. ($300,000 X 4% = $12,000/year. $12,000 divided by 12 months = $1,000 per month.)

Unfortunately this answer too, is subject to certain assumptions. First, it assumes that the US economy, inflation, and investment market returns of the future will be similar to what they have been in the past. If that is true, then we can assume inflation will average around 3.5% (3.42% according to,

What that means then, is that in order to keep pace with inflation and still withdraw 4% per year, your investment assets will need to average around 7.5% per year. By withdrawing only 4% you are allowing the remaining 3.5% to be reinvested back into the portfolio for future growth as a hedge against inflation. If your account grows by 3.5% each year, the 4% you withdraw will also be growing by 3.5% allowing you to keep pace with the rising cost of living. (We'll assume that you've accounted for taxes within the amount you've chosen to withdraw.)

"Now hold on," you may say, "4% doesn’t seem like very much. If the stock market averages 11% per year, why can't I withdraw 7.5% and still reinvest 3.5% as a hedge against inflation?"

The key word here is "averages." Like all averages, stock market averages are made up of widely varying highs and lows which can dramatically impact the value of your portfolio. We need look no further back than the last ten years to see a great example of this.

If we were to look at the S&P 500 from 1998 to 2007, you see a range of returns from a positive 26.67 to a negative 23.37.

The problem is that negative returns hurt your portfolio far worse than positive returns help it. As such, we must seek to avoid losses at all costs. For example if you start with a portfolio of $100,000 and lose 25%, the value of your account is now down to $75,000. But from there, you now need a return of 33% on your remaining $75,000 just to get back to break even.

Limiting your potential losses, of course also means limiting your upside potential. Unfortunately, so many people are so eager to leave their jobs that they choose to focus on the best case scenarios. If those best case scenarios don't work out, they find themselves in deep trouble because they took too much risk and experienced losses in their portfolios. Because losses hurt so much worse than gains help, we must take a more conservative stance at the outset to protect our assets.

One way to measure the volatility of your portfolio, and therefore your risk of taking a loss, is to look at it's standard deviation. Standard deviation is just a fancy term for normal (i.e. - the "standard") variation (deviation.) The standard deviation measures the normal swings that an investment experiences around it's average mean return.

Take for example, a hypothetical portfolio that averages 10% return per year. (I warned you - this is the detailed explanation!) That return may be made up of individual year by year returns of 0%, 10%, 20%, -20% and 40%. While the average return is 10%, the range of returns is anywhere from negative 20% to positive 40%, a 60% range! If you were to chart these returns on a graph, they would form a typical bell curve, with roughly 65%of the returns falling within one standard deviation measure of the mean return. 95% of the occurrences will fall within 2 standard deviation measures of the mean.

What that means then, is that if you have a portfolio that averages 10% per year, but has a standard deviation of 20%, you can expect in 95 years out of 100, that your return on this portfolio will be somewhere between a negative 30% (calculated starting from the average return of 10% minus two times the standard deviation of 20%, for a total of a 40% reduction from the average mean of 10%) to a positive 50% (again, calculated starting from the average return of 10% plus two times the standard deviation of 20%, or 40%.)

A portfolio of this nature is almost assuredly going to experience heavy losses from time to time. And while it will also experience tremendous gains, the withdrawals that you take will reduce the gains and further magnify the losses, resulting again in negative returns having a far greater negative impact on your asset balances than positive gains will help.

With all that being said, when you are ready to begin withdrawals from your investment assets, you should work with your financial advisor to create a portfolio that has a standard deviation that is half the average mean return. If you and your advisor can create a portfolio that averages 10% with a standard deviation of 5%, great. But in most cases, to limit your standard deviation requires that a larger percentage of your assets be in more conservative, less volatile investments, which will limit your upside potential thereby making the 10% goal elusive. A more attainable goal would be to shoot for an average return in the 7-8% range with a standard deviation of 3.5-4%.

When it's all said and done, a Safe Withdrawal Rate is one that allows you to create a portfolio that limits your downside exposure and still reinvest enough to keep pace with inflation. For many, 4% is that rate. Others, will be willing to take more downside risk and bump that rate up a bit, and still others will be even more conservative. Regardless of exactly what rate you choose, remember that many people define financial security as freedom from worry about money. If that's you, then the best portfolios are often SWAN portfolios - those that allow you to Sleep Well At Night.

Keith Weber, founder of the Rethinking Retirement Institute, spent 20 years in the financial services industry. He is now a consultant, speaker, and Certified Professional Retirement Coach helping people prepare for the non-financial aspects of retirement. The information presented here is for educational purposes only. Please consult a qualified financial advisor for assistance regarding your specific situation. Keith can be reached at or for more information, visit



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