Travel is expensive – and nobody wants to dip into their savings to do it more than they absolutely have to. 

That’s why every retiree should have a strategy for when they will withdraw money from their accounts, which accounts they will draw from first, and how much they should withdraw every month, quarter, and year.  There are many potential strategies to choose from, and a near-infinite number of ways to customize each strategy for you.  Over the next few editions of this newsletter, we’ll break down a few of the more common.  This month, let’s look at:

4% Strategy.  With this, “back-of-the-napkin” approach, you take out 4% of your portfolio in your first year of retirement.  Then, every year afterward, you increase the amount you withdraw to be consistent with inflation.  This helps ensure you continue drawing enough to maintain your lifestyle as prices go up.  (Except in very rare circumstances, prices will always go up over time, even if the inflation rate isn’t particularly high.) 

Now, your needed withdrawal rate may not be 4% in that first year.  It could be 3%, or 5%, or whatever.  The point is that you establish a “just enough” baseline early on that you gradually add to year over year to keep up with inflation. 

Every strategy comes with both benefits and downsides, and this one is no exception.  The downside is that the 4%-plus-inflation strategy can sometimes be a little too rigid depending on what’s going on in the markets.  For example, in a bear market, you may want to dial back on your spending so you don’t drain your investments too quickly.  In a long-term bull market, on the other hand, you may find yourself underspending.  That means leaving goals and dreams on the shelf that you should be enjoying. 

However, if you expect both your spending and your expenses to remain fairly consistent year to year, then some variation on the 4% strategy may work well for you.  As always, it’s important that whatever strategy you choose be consistent with your overall financial plan. There is no such thing as a strategy that suits everyone.  It will always require at least some customization!