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In Part I, we introduced the concept of “withdrawal rates”, and offered a brief history regarding how financial developments during the past 15-20 years have led to a significant shift in our understanding of what a sustainable withdrawal rate might be!

We also introduced you to a seasoned and accomplished financial professional (and leader) within Merrill Lynch Wealth Management. Responding to my question regarding how to determine a sustainable withdrawal rate appropriate for today’s world, Steve indicated that the often-referenced “4% withdrawal rate” is overly simplistic. Here in Part II, Steve offers details regarding why and how a “4% rate” may not be appropriate for you!

From Steve Diltz:

“As mentioned in our recently released whitepaper, “Systematic Withdrawal Strategies for Retirees,” sustainable spending rates depend critically on a client’s age, gender and risk tolerance. For example, a 55-year-old female retiree seeking a moderate (90%) certainty of not outliving her wealth can sustainably spend only 3.2% of her assets in the first year. However, a 75-year-old woman is able to spend 5.2% because she has a lower remaining life expectancy (due to her age) and therefore her annual spending can represent a larger share of wealth.

“In addition to age, gender also matters in determining a client’s spending rate. In the whitepaper titled, “Planning for Retirement: Addressing the Unique Needs of Women,” on average women outlive men by about five years. Therefore, a woman must plan for her nest egg to last longer. In fact, according to the Social Security Administration, women who reach age 65 can expect to live an average of 20 more years.

“Now, let’s consider a parallel example. A 75-year-old woman may spend at a 5.2% rate; however, a man the same age can only afford to spend 5.5%. And if we consider two 75-year olds who are married to each other and desire to preserve their wealth through the lifetime of each one of them – they should limit annual withdrawals to just 4.9% (or less).

“In addition, each client should consider how much certainty they desire when determining their sustainable spending level. A client who is willing to take risks will have a higher spending level than a client who is not willing to aggressively invest. For example, a 65-year old woman seeking a moderate (90%) certainty of not outliving her wealth can sustainably spend up to 3.9% of her assets. However, if she is willing to tolerate less (80%) certainty, she may spend 4.5%, while if she seeks greater (95%) certainty, she may spend only 3.5%.

“Essentially, there is no one-size-fits-all guidance for retirement spending rates! Each client requires individualized attention, since each client is unique. Any calculation regarding a sustainable financial plan in retirement must consider the age and gender of each client, as well as her/his tolerance for uncertainty (that is, his/her risk tolerance).

“For example, the financial wellbeing of a 60-year-old female with a $1 million investment portfolio who spends at the rate of $60,000 per year may not be sustainable. However, a retiree 20 years her senior who is spending the very same amount might be considered to be spending “too little”.

“In summary, although the “4% withdrawal rule” was original developed with the intent that it could provide retirees with a helpful guide… it is, in fact, overly simplistic. Therefore, no retiree should blindly assume that a 4% withdrawal rate is will provide him or her with a sustainable retiree lifestyle! Instead, to ensure she/he will not outlive the available resources, each retiree should consult with a financial professional.”

Thank you very much, Steve!

If you want to contact Steve with questions or for help with planning, you may reach him at: 630-954-6346.



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