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I’ve always been interested in retirement account alternative withdrawal strategies. Different strategies provide different outcomes. Some support higher initial spending rates, others leave larger amounts for a legacy. There is a middle ground with higher initial rate, and modest remaining amount.
RMD (Required Minimum Distribution) is an often discussed method of withdrawals from retirement accounts. There are others and Morningstar is publishing a series on nine different approaches. These range from simple to complex. “The best retirement withdrawal method depends on what’s most important to you.” The articles look at differing approaches with can support different withdrawal rates. Some prefer a higher initial rate, others prefer leaving a legacy.
This is a summary of one of the articles. It is available on the website and I’ve included a link at the end of this port.
The three methods in this article allowed for higher spending rates at the beginning of retirement, higher than the “base case” which has a 3.9% starting safe withdrawal rate.
The purpose of this specific article was to see which methods could support the largest payout over a 30 year period. As usual, the methods provide a 90% certainty using the data. The methods have different withdrawal rates and leave different balances at the end of the 30-year period. Alternately, Morningstar also looks at strategies to maximize your legacy.
The popular “4% Rule” approach Is based on historical stock and bond data from 1926 to 1976, emphasizing downturns in the 1930s and 1970s.
Morningstar “used forward-looking return and volatility assumptions to test 1,000 hypothetical return patterns over a 30-year period.” Each strategy was tested to estimate the starting safe withdrawal rate that would have supported spending over 30 years with a 90% probability of success.
There were three strategies which maximized lifetime spending. The portfolio began with $1 million in savings:
Probability based guardrails ($1.55 million lifetime spending)
RMD ($1.50 Million lifetime spending)
Guardrails ($1.36 Million lifetime spending)
Each strategy allowed higher lifetime spending and “the built-in flexibility of all three of these methods allowed for higher spending rates at the beginning of retirement compared with our base-case starting safe withdrawal rate of 3.9% of assets.”
Initial withdrawal rate:
Probability based guardrails (5.1% initial withdrawal)
RMD (4.7% initial withdrawal)
Guardrails (5.2% initial withdrawal)
Maximizing lifetime spending involves drawing down assets at a faster rate, which in turn leads to less money left over at the end of the 30 years:
Probability based guardrails ($230,000 remaining)
RMD ($120,000 remaining)
Guardrails ($700,000 remaining)
https://www.morningstar.com/retirement/heres-how-you-can-spend-more-during-retirement
Isn’t this a bit of the cart before the horse? I assume before people retire they know what they need to live on for all purposes, including saving, emergency spending, etc.
It is also significant if the withdrawals are taxable or not. Factor in say 3% for inflation.
Don’t you now have the amount you need to withdraw? That means what your goal is how much do you need to accumulate to meet that need.
That seems a priority over having what has been accumulated dictate how much can be spent in retirement.
It would be nice to end retirement with a balance, but is that a priority goal?
Wouldn’t it be nice to live on an annuity plus earnings on your investments and not worry about other withdrawals?.
When you think you know what you need in retirement you must then decide if the withdrawal rate will deplete savings within a lifetime. No one wants to run out of money in retirement. Allegedly the median household savings age 65-74 is $200,000. When retirement arrives, by choice or necessity, it may be necessary to make a difficult decision, such as drawing more to sustain a lifestyle and/or trimming expenses. For anyone with sufficient savings simple RMDs may work. For those who lack savings, different withdrawal approaches may provide a solution. This is especially true if one has limited savings, but wants to leave a legacy. Some may argue that HD readers are enlightened and have sufficient savings. I don’t know what’s typical for a reader.
Once you know you have what you need, it’s good to know how much more than that you can spend.
I look at that as one and the same. I live on a pension. I knew when I retired and I know now what I can spend – needs or wan