Retirement Essentials

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Calibrating Withdrawal

Certainty, stability, confidence—We all yearn for these. And this is why, when grappling with a multi-faceted financial decision—such as how to settle on an adequate retirement withdrawal rate—we draw on the learning, experience, and expertise of those around us; those “in the know.”

While conventional wisdom always has an opinion, ultimately your own personal situation speaks the loudest. Don’t worry: At FNA, we take everything into account. Together we will explore some of the variables that could impact your retirement withdrawal rate. We guarantee you will leave feeling better equipped to handle this.

Before we juggle the numbers, let’s just say that investing time to determine your ideal withdrawal rate is of valid—in fact, vital—concern. Here is the bottom line: The rate at which you draw down your retirement portfolio will affect its longevity. The general goal is to maintain a comfortable standard of living, and for the individual and the assets to share a common life expectancy. Yet, to achieve neither an ascetic nor a decadent retirement—not using assets to the full, nor depleting them prematurely—serious balancing skills are in order.


Setting a hard and fast rule for application in a market that is so prone to fluctuation is a tricky business. Yet for years, many professionals have touted the traditional 4% average withdrawal rate as “safe”—Insulated from inflation, market fluctuation, and portfolio failure. Essentially, they are using a steady withdrawal approach. And not without reason: A lower draw down rate on a 50/50 traditional portfolio has a hypothetically better chance of surviving inflationary periods. William Bengen works to prove this in his well-known and oft-referenced October 1994 study. Some may reason that in ‘good years,’ when the market is soaring, retirees should ride its coattails and enjoy the rewards—these are the “Golden Years,” after all. Yet Bengen stresses regarding client withdrawal rates:

“…not to increase their rate of withdrawal just because of a few good years early in retirement. Their 'excess returns' early may be needed to balance off weaker returns later.”

More recently, and in light of market fluctuation, it’s been noted that perhaps an even more modest 3% withdrawal rate is the safest option for someone who prefers to ‘lock and load’ the next 30+ years. An inevitable objection would be that a 3% draw down rate is meager, even when based on a $1M portfolio. With the average U.S. household netting around $50K annually, subsisting on $30K is an obvious downgrade—especially when considering inflation, and given that most Americans will not be retiring with a $1M portfolio.

Now, before you begin to feel uneasy and overwhelmed, consider this: By age 65, the mortgage and vehicle(s) are likely paid off, children are likely on their own, and general expenses are likely on the low end. If major debt is eradicated by this point in life, and items that could be top monetary concerns—housing and healthcare—are addressed by Medicare or your personal healthcare plan, 3% could be a viable option.

However, if the above scenarios leave you feeling less than confident in your portfolio—never fear, choices you most certainly have. If varying from the typical 60/40 stock and bond ratio is something you can wrap your mind around, then broader diversification may be your answer. Jonathan Guyton’s deeper exploration of Bengen’s study led him to suggest a balanced multi-asset class portfolio, adding international stocks and real estate to the traditional large/small cap investments. With said changes, Guyton claims his plan:

  • Never requires a reduction in withdrawals from any previous year
  • Allows for systematic increases in withdrawals to offset inflation
  • Maintains the portfolio's ability to satisfy the first two conditions for at least 40 years

Figuring that inflation consistently undermines purchasing power, and allowing for market fluctuation, how can Guyton’s plan work? Simply put, through the plan’s—and the client’s—flexibility. If the portfolio’s performance takes a dip into the negative, a “freeze” on the withdrawal rate is enacted until markets recover. Subsequently, there is no “make-up” for this freeze in future withdrawals. All in all, Guyton’s plan counts on a client’s willingness to bend with the market.

True to 21st century trends of personalization and individual tailoring, William Klinger’s 2007 study suggests a more organic approach to retirement planning, flexing withdrawal rates in tandem with portfolio performance and client comfort level. Klinger introduces three “decision rules” that provide a framework of structure to his plan. He claims:

"Using decision rules dramatically increases the present value of the total withdrawals...while still achieving a 99 percent success rate. For example, a uniform withdrawal profile can be created using a safe initial withdrawal rate of 5.3 percent for a 40- year retirement period, versus 2.5 percent with no decision rules."

Klinger’s “rules”—Modified Withdrawal, Capital Preservation, and Prosperity—are fairly complex. Presented in formulas, with variables being set by the retiree and financial planner, the “rules” allow greater flexibility and annual appraisal of portfolio performance.

Regardless of the track you choose, the most common fear is the risk of outliving retirement savings. Two big words to focus on: Sustainable. Planning. Just because you have a plan—a very good thing—does not mean that life events will blindly follow it. Mid-course corrections could be necessary. The plan is your constant, for comparison and guidance, but actual draw rate may require variance from year to year. In the end, this is your decision to make—your comfort level and standard of living are variable keys to the equation.

Also a wise idea: A reserve of liquid assets that can pad the lean years. Aim to have enough put aside to cover your spending for at least a year. If the market takes a turn for the worst, you will have sufficient funding at the ready, and can stave off selling stocks that could perform well once the market recovers. And remember to capitalize on funding that is available to you—be it from Social Security, your annuity, etc.


As discussed, while you may be able to set a definite withdrawal rate, and a projected portfolio lifespan, inflation is a variable wholly outside your realm of control. In spite of the uncertainty, allowing wiggle room in your planning for inflation is a wise choice. To understand just how drastically inflation can dwindle your life savings, consider an example.

Negating any impacts from taxes, we will assume a $1M portfolio yields 5%, providing annual income of $50,000. Supposing an average 3% inflation rate, to maintain purchasing power, the annual withdrawal is bumped up to $51,500 for the subsequent year. Depending on the rate of inflation in that year, $51,500 could be pushed higher, cutting deeper into the portfolio’s principal. At this rate, a plan that was initially designed to sustain a 30+ yearlong retirement at $50,000 a year will fall flat after 27 years at most. Thus the belief that banking “excess” returns in good years helps to make up for inflation and down markets in later years.


Everyone agrees—finding the “sweet spot” in any area of retirement planning is not an easy task. Let’s take a comprehensive look, and bring two more variables to the table: Life expectancy and volatility.

Here’s some good news: These days, folks are living longer—well into their 70’s, 80’s and beyond. Yet, providing for oneself for a possible 30 years or more past retirement can be a daunting proposition. Healthcare and standard of living could be very real concerns. Again, balance reigns supreme. Underestimating can lead to a real shock—running out of funds at a critical time in your life. Overestimating can deny you of the joy of retirement, causing undue worry and penny-pinching.

So, while you’re “factoring,” why not take time to investigate some practical channels? To begin, investigate the health of your closest family members. Oftentimes, your relatives’ health can shed light on your own future. Take a look in the mirror—Lifestyle, habits, job risk, stress, and nutrition, among other factors, can aid in illuminating future healthcare needs. Not to be forgotten: Talk to your advisor! Based on years of experience, a realistic expectation regarding future healthcare expenses could be just a question away.

As you surely know, the nature of your retirement portfolio—either aggressive or conservative—will affect its lifespan. A more aggressive portfolio may produce higher returns, but is also subject to a higher degree of loss. Taking a conservative bent could produce steady returns, but could sacrifice purchasing power to inflation. Here is where your comfort level comes into play: Is a bit of uncertainty in early years worth the potential long-term reward? Conversely, is the hoped-for reward worth the increased potential for risk and loss? When asking, “What can I live with?,” the heart of the question is, “What can’t I live without?”—Necessities, in whatever form, should come first in your evaluation of how much capital you will need throughout your retirement, and how much risk you are willing to assume in reaching that goal.


Ironically, some of life’s most important financial decisions aren’t given an equivalent level of consideration. And we admit, oftentimes fear and a lack of confidence in decision-making can push important matters to the back burner. Honestly though, no one expects you to understand every nuance of your retirement plan; just be sure you have a sound one. Planning for retirement is a lifelong process. So whether it is staring you in the face, or far down life’s road, take time out now to ask the serious questions, and demand thoughtful answers.

Here is where we can help. Paralysis and indecision in the face of industry jargon and an overabundance of data is all too common. Fight the trend, and get in touch with your trusted FNA advisor—a friendly face who knows you and your circumstances, and sincerely welcomes your concerns. Working together, we can give this the priority it deserves.

Securities offered thru Sterne Agee Financial Services, Inc., member FINRA/SIPC. Advisory services offered thru Sterne Agee Investment Advisor Services, Inc. Securities and advisory activities supervised from 4407 Belmont Ave, Youngstown OH 44505, (800) 589-2023.