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:
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%.
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:
- Specify your income goals to be met via withdrawals
- Specify the assets from which withdrawals will be taken to fund the income goals
- Specify the withdrawal rate each year
- Specify the pecking order of withdrawals to take place from the different asset classes
- 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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