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Can I Safely Withdraw Principal in Retirement?

Withdraw principalAs a cross-border financial advisor, one question I hear nearly every day is, “Can I afford to withdraw my principal in retirement?” For most of my clients, the short answer is, yes, but it is important to know how much and from which accounts you can dip into your principal.

When withdrawal is part of a strategy

The financial planning industry’s “4 Percent Rule” is commonly applied in determining how much principal you can draw down annually without risking outliving your money. Based on historical worst-case scenarios for a portfolio allocation of 60% stocks and 40% bonds over the last 100 years, 4% is considered a safe withdrawal rate in most situations. However, since each person’s situation is different, don’t rely on a rule of thumb as customized financial plan.

A simple calculation to determine how much capital would be needed to generate a desired level of income using the 4% strategy is to multiply your income need by 25. For example, if you need $100,000/year in retirement, you would need $2.5 million of capital at a withdrawal rate of 4%.

When withdrawal can be done conservatively

According to a survey by AARP, only a quarter of retirees dip into their principal, largely due to their fear of outliving their assets. Many retirees simply adjust their spending to be able to live off their income, even though they may have adequate principal to use. However, if withdrawing principal is done properly, with caution and attention to tax efficiency, retirees should have nothing to fear.

Determining how much principal you can safely withdraw each year should be an annual calculation. Factors such as your living needs, interest rates, market performance, inflation, and your general outlook on the future will affect the calculation. Work with your financial advisor to review your retirement income plan throughout your retirement. To learn more about income planning, download the Retirement Planning Book (for free).

 

Douglas Goldstein, CFP®, investment advisor, is the co-author with Grandmaster Susan Polgar of Rich As A King: How the Wisdom of Chess Can Make You a Grandmaster of Investing and director of Profile Investment Services, LTD, which specializes in helping people meet their financial goals through asset allocation and financial planning.

Profile Perspectives is a personal finance blog based on articles Doug Goldstein, CFP®, director of Profile Investment Services, Ltd., published in The Jerusalem Post. The information posted is purely informational and does not constitute investment or tax advice. Advertisements on the site are neither endorsements nor recommendations. Consult your professional advisors before making any investments based on articles or advertisements. Securities offered through Portfolio Resources Group, Inc., member of FINRA, SIPC, MSRB, FSI. Accounts carried by Pershing LLC., Member NYSE/SIPC, a subsidiary of The Bank of New York Mellon Corporation.

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