Retirement Withdrawal Rates: It's About More Than The Math

by: Roger Nusbaum

Over the weekend readers left links to two different articles about withdrawal rates here and here. Zooming out a little bit there seems to be a theme popping up about the 4% rule being too conservative. The second link laid out where a 6% withdrawal rate resulted in a likely outcome of being out of money for the last 7.5% of your expected retirement years.

That will make more sense if you read it but if your retirement is 30 years then the last two years and three months you'd only have social security, no real investment portfolio. Maybe this is when you'd call Robert Wagner for a reverse mortgage.

Obviously I believe in the 4% (or less) rule, but I concede that I am very conservative and this is something that people with investment portfolios need to figure out for themselves. I will continue to make the case for 4%, depending on your interest level you may read other articles that compel you to be comfortable with some other number--6% represents a 50% raise after all.

If the 6% scenario above played out exactly as the numbers indicate then you'd better hope that social security is still there and paying what you need it to pay. When I wrote about social security a few days ago one reader seemed to be saying the social security is just fine. I'm sure that is the conclusion he draws and I am sure we all draw our own conclusions about the likelihood of getting all or some of our social security.

I assume I will get nothing. Some may assume they will get the entire payout (this is certainly reasonable for people above a certain age) and some might assume some reduced portion. Whatever you believe you will get from social security would play into whether a 6% withdrawal rate makes sense for you. If you are expecting any number greater than zero, then you need to figure a confidence level in that assumption.

I'm pretty confident about zero.

A personal concern I have with most of these articles is the assumption of linear returns combined with one-off expenses. For someone with a $600,000 portfolio the combination of a year like 2008 and needing to replace the roof could be devastating. Let's say these people take out their 4% plus another $20,000 for a roof (does that number make sense?) and the $360,000 in equities (so a 60/40 portfolio) went down by 25% (a pretty good result by 2008 standards). So what started the year as a $600,000 portfolio is now down to $476,000 to start 2009.

I would submit that many people will have more than one really expensive one-off during their retirement. What if the next really expensive one-off comes during the next bear market? This sort of stuff contributes to my being very conservative on these issues. Obviously you reading this must decide for yourself and then own the success or failure of your decision.