What Is a Safe Withdrawal Rate?
Generally speaking, a withdrawal rate simply refers to how much of the balance in your savings account you withdraw every year. Most often, finance experts talk about the withdrawal rate as it relates to retirement. For example, if you saved $100 for retirement and withdrew $5 each year, your withdrawal rate — expressed as a simple percentage of your yearly withdrawal over your original savings — would be 5%. Knowing how to calculate a withdrawal rate will help ensure that a retiree will not withdraw too much too quickly and lose their nest egg prematurely.
Why Is the Withdrawal Rate Important?
A withdrawal rate that is too high can be disastrous. Putting interest aside for a moment, if you wanted your $100 retirement nest egg to last 25 years, that means you could only withdraw $4 (or 4%) each year. Miscalculating a safe withdrawal rate could be dangerous and cause a retiree to lose their financial security before the end of their life. For example, if someone instead decided to withdraw 10%, that same $100 nest egg would only last 10 years, not 25. Experts recommend establishing and sticking to a safe withdrawal rate to make sure retirees do not withdraw too much too quickly.
The concept of a withdrawal rate is also applicable to you while you are still in the workforce. If you want a higher withdrawal rate — even a small difference of 4% instead of 3%, for example — you’d have to work more aggressively and/or for more years in order to enjoy the same nest egg by the time you retire.
What Should My Withdrawal Rate Be?
Hopefully, you now understand how thinking about your withdrawal rate is essential to your retirement and retirement planning. However, there are a few intricacies to the withdrawal rate that warrant discussion. The first is how the interest rate for your savings account affects your withdrawal rate. Many retirement savings accounts accumulate fairly generous interest. For example, if your retirement savings gains 1% interest each year, then a 1% withdrawal rate wouldn’t actually lower your balance at all. It can be worth speaking to a local bank about retirement account benefits and how to set a smart withdrawal rate based on your unique financial situation.
Secondly, things change. Economic conditions at the beginning of one’s retirement may be drastically different than those at the end. Fluctuating economic conditions can significantly alter a retirement plan. And often, retirees target withdrawal rates that are much higher than the experts recommend. That’s why, generally speaking, the higher the withdrawal rate, the greater the risk and the less wiggle room available. These uncertainties should prompt you to speak with a financial professional, who can refer to retirement models and predictions to help you find your own withdrawal rate sweet spot.
Hopefully, you now understand how a withdrawal rate works and how it affects your retirement and associated planning. But if you think a more personal touch is necessary, or would like to find out the best withdrawal rate for your own financial plan, consider speaking with a representative at Citizens National Bank.