By Daniel Baumgartner & Petra Peters
A critical aspect of planning for retirement is determining your ideal rate of withdrawal. Your withdrawal rate is the amount you can safely remove from your retirement portfolio each year without compromising the longevity of your wealth. To help you determine your ideal withdrawal rate, we’re sharing three tips on how to determine a withdrawal rate that meets your financial needs in retirement.
Assess Your Retirement Expenses
Before you step into retirement or begin taking withdrawals from your portfolio, it’s best to start by evaluating your potential expenses. Having a clear understanding of your lifestyle costs and spending habits helps you determine how much you’ll need to live comfortably in retirement. Safeguarding your financial needs accurately is a challenging undertaking, but it begins with these three aspects.
- Develop a detailed budget: Document your current living expenses. Pay close attention to fluctuating or discretionary costs that may increase or decrease. You’ll also want to account for how those expenses may change in retirement. Potential new expenses such as travel, hobbies, or healthcare may increase during retirement years.
- Consider the impact of inflation: Inflation can erode the purchasing power of your retirement savings over time. Factoring in a realistic inflation rate makes your retirement expense calculations much more accurate. According to the most recent data from the Bureau of Labor and Statistics, inflation rates have fluctuated between 1.7% and 6.2% over the last 10 years.
- Include healthcare costs: As you continue aging, healthcare costs tend to increase in retirement. Assess what your potential medical costs could consist of and how this would affect your withdrawal rate. You’ll need to factor in expenses such as insurance premiums, deductibles, prescriptions, and long-term care.
This process of evaluating your potential expenses is complex and often requires the use of retirement planning tools and experienced and knowledgeable advice to account for its multifaceted nature.
Understand Safe Withdrawal Rates
With a clear understanding of potential retirement expenses, the next area of focus should be gaining an understanding of safe withdrawal rates. These rates are calculated based on historical market performance and aim to help you sustain your retirement portfolio throughout your lifetime.
When considering withdrawal rates, many retirees generally abide by the 4 percent rule. The 4 percent rule is a widely suggested guideline that assumes your portfolio has a mix of stocks and bonds with a 30-year retirement horizon.
While this may work well for people in their 60s, retirees outside of that age range may want to follow different withdrawal guidance. As medical advancements allow for longer life spans, it’s important to withdraw from your retirement savings at a rate that sustains your financial needs throughout retirement.
Finding your ideal withdrawal rate takes more than a one-size-fits-all approach. Consulting with an investment advisor may help you determine which withdrawal rate best suits your retirement expenses and portfolio.
Regularly Review and Adjust
Deciding on your withdrawal rate isn’t a one-time exercise. Once you’ve established a financial plan and chosen your withdrawal rate, it must be put into practice. Only then can you assess any shortcomings. After the initial withdrawal, you’ll want to reevaluate how well it fits your finances and adjust your strategy as needed.
If you’re working with an investment advisor or financial advisor, this might consist of annual portfolio reviews. These allow you to view how your retirement portfolio’s performance aligns with your expectations and goals. They may also cover the impact of market fluctuations throughout the year and make calculated adjustments to your plan that help you stay on track.
Get Help With Your Withdrawal Rate
Determining the withdrawal rate that works best for your retirement portfolio helps you maintain the longevity of your retirement savings. While this is a crucial aspect of planning for retirement, it’s also a complex decision that may require professional assistance.
If you’re approaching retirement and need an investment advisor who can help you decide on the withdrawal rate that’s right for you, reach out to us directly at 212-355-1234 or firstname.lastname@example.org for the New York office (Petra) or 855-248-6630 or email@example.com for the New Jersey office (Daniel). You may also contact us here to schedule a meeting and we’ll get in touch with you soon!
Daniel Baumgartner is a founding partner of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Daniel has extensive experience in marketing, development of special U.S.-investment products, as well as customer acquisition and relationship management. His ultimate goal is to make a difference in his clients’ financial lives through honest investment advice. He strives to provide high-touch, personalized service and enjoys getting to know a client’s personality as it relates to their financial circumstances before crafting the right solutions. As money is a very personal subject, Daniel takes his responsibility as an advisor very seriously, forming long-term relationships with clients based on trust.
Daniel received his degree in finance and international business from New York University. Outside of the office, he is a hobby landscape, street photographer, and has a great interest in U.S. and European history (16th-19th centuries), believing it helps him answer the question “Why is something the way it is?”
Petra Peters is a founding partner and the Chief Executive Officer of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Petra has decades of experience in the banking industry, asset management, overseeing the administration of individual accounts, and designing and advising specialized funds tailored to the requirements of international private and institutional clients. With extensive knowledge of both Europe and the U.S., she’s able to provide advice and services beyond the typical investment advisor. Petra desires for her clients to live a financially care-free life so they can pursue their passions, and she values their trust and gratitude. Creating invaluable friendships formed over years of partnership, some clients even consider her part of their family.
Petra’s interests outside of work include classical music, history, travel, charities, motorcycling, and golf. She is also on the board of a German charity.