As they near retirement, one of the first questions soon-to-be retirees ask is “how much of my savings can I spend each year and still maintain the principle value of my portfolios?” Handling cash flow when retired is quite different than handling cash flow when a pay check comes into your bank account twice a month and this change takes a bit of getting used to.
Years ago, most planners used a 4 1/2%, sometimes even 5% withdrawal rate as a “safe” rate. In other words, a $1mm portfolio could safely provide up to $50,000 (5%) a year in cash flow without ever really depleting the $1mm.
Then came low interest rates. Money market fell to 0.01%, bonds paid 1 3/4%, and suddenly, even if the equity side of someone’s portfolio (often only 40% of the overall portfolio) provided 8% returns, the fixed income portion now only provided 3/4 of 1% and portfolio cashflow assumptions changed dramatically.
“Safe” withdrawal rates on a $1mm portfolio went from $45k or $50k to $35k…a dramatic change. Well, as interest rates have moved up over the last 18 months or so, so has the “safe” withdrawal rate.
Retirees can now, with a 90% or so surety factor that they will not run out of money, withdraw 4+% from their portfolios for their cashflow needs. Yes, the bond market decline has been painful and yes inflation is frustrating, but the upside of higher interest rates is better cashflow. Take advantage of it!
