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What Is the Best Withdrawal Strategy for a Retiree

2/27/2014

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Q. I am about to enter my retirement and wondering how to develop a systematic way to withdraw money from my retirement savings?

A.
It is important for a retiree to develop a withdrawal strategy beforehand so irrational actions wouldn't take place in the event of market volatility.

The goal is set up a clear course of action and take it when something as expected happens.  For example, if a) happens, then do b) in response so you can stay on track.

While such a withdrawal strategy might vary with person, a general principle could be something like this:
  1. Specify your income goals to be met via withdrawals
  2. Specify the assets from which withdrawals will be taken to fund the income goals
  3. Specify the withdrawal rate each year
  4. Specify the pecking order of withdrawals to take place from the different asset classes
  5. Specify the trigger points for adjustments other than inflation-based increases

With such strategy in place, you won't panic and take emotion actions in a market volatility.  


For example, you set your withdrawal rate to be 6%, and your asset is $1M (which implies your desired spending level is $60K per year), If your withdrawal rate reaches 7%, you will take an action to cut your spending by 10%.

Next week, your asset dropped to $900K due to market drops, no panic, because now your withdrawal rate is 6.7%, still within the 7% trigger point.  If it further decreases to trigger the 7%, you know what to do - cut your spending by 10%.


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