You’ve worked hard and saved for retirement, and now you’re ready to start drawing income from your portfolio. How much money should you take each year? You need enough income to cover your bills and maintain your lifestyle. But you don’t want to set up distributions that are so large they are unsustainable.
There are numerous factors that can affect your income needs and your portfolio’s value. If the market suddenly dips, does that mean you need to reduce the amount you’re pulling out of your portfolio? What if your retirement lasts several years longer than you planned? What if you need to help a child or parent with unexpected expenses? How do you get the most out of your retirement account without draining it completely?
Here at Guiding Wealth, we help our clients develop sustainable income distribution plans that meet their needs. Here are some reliable tips for building an optimal plan for a resilient portfolio.
Income Distribution for a Self-Managed Portfolio
Creating a retirement income plan can be complicated, especially if you want a simple, long-term solution. One of the most well-known rules for sustainable income distribution is the 4% rule, which was created by financial advisor William Bengen in the 1990s. (He later modified his rule to allow for distributions up to 4.5%.)
The idea is simple: during your first year of retirement, you can withdraw 4% of your total portfolio. Each year after that, you can adjust the dollar amount to account for inflation. In theory, the 4% rule minimizes your risk of running out of money over the course of a 30-year retirement. It’s not a rule, necessarily, but it’s a guideline that helps people understand how much they need in their retirement funds. This 4% has, historically, helped people set goals around how much they needed to retire.
For retirees who want a set-it-and-forget-it plan, the 4% rule has been the standard recommendation for decades. However, it may not be the right choice anymore. When we’re looking at income distribution in retirement, there are a lot of factors we look at: sequence of returns (how much returns you make), how long you’re going to live, where you live, and more. If you don’t factor any of those in, the 4% rule has been a great standard. Many financial experts are saying that the number needs to drop to 3.3% due to current market factors, including interest rates and inflation, and lower investment returns.
If you manage your own portfolio and don’t want to change your income distribution frequently based on the market, your best choice may be the 3.3% plan. It’s a simple, conservative approach that helps ensure you don’t run out of retirement funds. Seeing the withdrawal rate decrease can look a little intimidating, but you can create a withdrawal plan that is specific to you. With any retirement income plan, it’s far more nuanced. To help you better understand why a 3.3% withdrawal might be right for you, keep reading.
Portfolio Management for Increased Sustainability
While the 4% rule (now 3.3%) is a good rule of thumb, it’s not always the best choice. This rule is based on two significant assumptions: a stable market and unchanging income needs.
There is flexibility, however. The rule also assumes a 30-year retirement. But if your retirement is shorter, you could safely take out more money; if it’s longer, you would need to reduce your withdrawals to ensure your money doesn’t run out. In the end, a 3.3% income distribution may still be a safe choice, but it’s usually not optimal.
There are many other choices you can make to manage your portfolio in a way that increases sustainability and also meets your income needs. The best way to implement a customized management strategy is to work with an experienced financial advisor. At Guiding Wealth, we help each client set up and modify their income distribution plan based on their needs and the current market.
Protecting Your Portfolio in an Unstable Market
If you’re working with a financial advisor, you don’t necessarily have to rely on a simple approach like the 3.3% rule. You can make adjustments to your income distribution plan based on changes in the market, inflation, and the returns you’re getting on your investments.
For example, research suggests that safe withdrawal rates can change dramatically just based on the market. For example, under good conditions, you may be able to safely withdraw up to 5.5% of your portfolio each year. However, you would also need to be willing to make adjustments, dropping that number to 3.5% if the market falls.
With this type of adjustable plan, you can enjoy the benefits of more income during favorable market conditions. As long as you drop that rate when the market requires a more conservative approach, you can feel confident that your plan is sustainable.
Get Expert Help To Maximize Income and Sustainability
How much can you safely pull out of your retirement portfolio? You need enough income to support your lifestyle, but you don’t want to undermine your portfolio’s sustainability. For most retirees, a set-it-and-forget-it income distribution plan is not optimal. There are too many factors and market complications that can affect your portfolio’s sustainability.
Figuring out how to use and protect your portfolio effectively can be challenging, especially in a chaotic market. The best way to get the most out of your retirement savings is to work with a Certified Financial Planner™. An expert Guiding Wealth CFP® can help you develop a clear plan for sustainable income distribution that meets your needs. Get started by calling Guiding Wealth at 214-810-3835 to schedule a consultation.