Let’s start with the 4% withdrawal rule. The rule states that , if you never spend more than 4% of your investment asset balance each year, then you increase the odds of living your retirement life with lower risk of running out of money.
But that is just a guideline, not a rule. It is not a guarantee, but in increases the likelihood.
Note that the huge part of our post retirement financial risk is determined by the sequence of returns and inflation during the first few years, or the first decade, if you may. As covered previously, one need to adjust the strategy based on actual performance of his or her retirement/investment assets and certainly should not blindly increase the amount spent every year by the inflation rate.
In summary:
- Only increase your spending if your investment asset is growing. Else, keep your previous year expenses.
- Reduce to 3% spending of investment asset during bad times, when asset not growing.
- Reward yourself to 5% spending of investment asset during good times, during economic boom.
- You could spend more in your early years then reduce spending (forego inflation increases) in later years when you don’t need as much money
- You could spend more in the early years and reduce your spending if you are unfortunate enough to endure an adverse returns sequence in the first decade.
These are the mix-and-match variations on how to approach withdrawing money. The bottom line is, you don’t have to be a robot and mindlessly follow the inflation rate into eventual financial tragedy. Adjust spending based on actual results (growth or decline) of investment portfolio, not based on behaviour or conventional retirement model.
To rephrase the points above, the strategy employed now is annual withdrawal tagged to a fixed percentage of your principal (aka retirement asset balance). This virtually eliminates risk of failure but causes variability in income based on portfolio value fluctuations. As the retirement balance rises, you will withdraw more and as your assets fall you will withdraw less. Whether or not your spending keeps up with inflation would be determined by the growth of your assets.
Flexibility and rationality are the keys. This will alleviate the risk of running out of money.
One-size-fits-all is a static concept used in conventional retirement plan or calculator. They are naive and dangerous. Don’t buy into it, even sometimes it is conventional wisdom.
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