What is a SAFE Withdrawal Rate in Retirement?

This question comes up a lot.  It is critically important for 2 primary reasons. First if you take out too much you will run out of assets before you run out of Life. Second if you don't know what you  can  spend  each year how do you know what income you will have in retirement!

Many people and most Financial Advisors are familiar with "The 4% Rule."  Everyone should be!
It states that you should be able to  withdraw 4% of your assets  each year in  retirement and Usually have your assets last as long as you live.  Note that I said usually!  You do not  want to be an  outlier who falls into the  category of retirees who fail to have their assets last!  What can you  do to  prevent it?  I encourage my clients to use a withdrawal rate of less than 4% when working  with their  self managed money.  There are products that offer a  guaranteed rate of withdrawal higher than 4% and  we can  discuss those later.

A recent article published in Financial Planning was titled " A Safer withdrawal rate using various returns distributions"  The  conclusions stated that a safer withdrawal rate for todays environment is only 2.52%.  Their work indicated that the more common 4% number fails almost 18% of the time.  That  conclusion says that 1 in 5 will die destitute if they don't adjust there spending or use other strategies besides self managing their  retirement  assets. Protection from that  risk requires the use of some SAFE Money Strategies for some significant portion of your assets.

Only 3 thing can guarantee you a lifetime of income. Social Security (if the government stops stealing from SS funds), an ADEQUATELY funded private pension, or a properly funded designed   and guaranteed life insurance product. Notice Stocks bonds mutual funds are not on this list because of Market Risk. They cannot  guarantee you a value tomorrow never mind a value 20-30 years from now.  Never Forget 2001, 2008-2009!  It can  happen again!  On  average you  get  negative  returns 2-3 year out of 10. Look at the  graphs  for  Stock Market Historical performance.   If  you  doubt there is  risk  answer these questions.
What is the true unemployment  rate today?  You need to  adjust the official numbers for those who quit looking! A more meaningful number is the % of working age adults  actually working!

Is  the Federal and  state government controlling their  spending?
Is the Deficit increasing?
Is Obamacare inflationary?
Is  the  real  cost of  goods and  services you need to  live on increasing?

"The Rule of 100" and Preserving and Growing Your Assets

Some of you  know about "The Rule of 100" but everyone should know it and understand how it works. Simply put this rule help you determine a smart allocation  strategy that helps protect your assets from excessive market risk. Protection from market risk is critical  as we age in order to  preserve our assets  for the second stage of our lives.  The  first stage of Financial Life is Asset Growth and Accumulation . This is followed  by the Asset Distribution Stage or Retirement Stage of Financial  Life. As we get older and unfortunately we all do, we need to transition from maximizing accumulation to the preservation  and distribution of our assets. Different types of professional specialize in helping plan and implement these different strategies.  Some people even think of this  as a three stage process. They group them into, Accumulation, Transition and Distribution or Retirement.

 The Risk we can safely tolerate needs to  drop  if we hope to properly preserve our assets for the retirement years.  A five year recession is not an absolute disaster when we are 35 and  have 30 or more years to make up for the downturns that WILL Happen. Notice I  said WILL and not May happen. On average we have 2-3 bad years every decade. We have 3-5 average years and 2-3 really good years. This trend is clearly shown in economic theory and actual history going back 100 years.

Not considering this in your financial plan is one of the major reasons people run out of assets in retirement.  The second  major reason people run out of money is simply not saving enough in the  earning years.  The best solution is to  learn and  benefit from THE RULE OF 100. The  rule states that  you subtract your current age from 100 and the answer represents the maximum percentage of your assets that should  be exposed to  market risk. As an  example a 55 year old should have no more than 45% of their assets exposed to market  risk. Some people have less market risk tolerance  and should have less exposure. As we age the formula means that we need to  further adjust our risk % allocation over  time. Using SAFE Money strategies gives us the opportunity to include Safe Money Products and still have up side potential growth that can  beat inflation  and allow us to keep up with the rising  Consumer Price Index (CPI).  Unfortunately a Bank doesn't allow  one to keep up with the rate of inflation. It has been 20 years or more  since banks have paid a decent rate of return to their depositors.  This means that you  have less buying power at the end of December than  you  had on January 1st. There are other forms of Safe Money Assets that  can  protect and grow your assets and still produce a reasonable Rate of Return.