Initial Withdrawal Rate Can Be More than 4%, Think 6%

Planning for retirement involves making crucial decisions, with one of the most significant being the initial withdrawal rate. Traditionally, the 4% rule has been considered a safe benchmark for retirees, but what if we told you that a 6% initial withdrawal rate might be a viable and secure option? In this article, we'll explore how adjusting your initial withdrawal rate can impact your retirement income and potentially allow for earlier retirement or a more comfortable lifestyle.

The 4% Rule Revisited:

The 4% rule, introduced by William Bengen in 1994, suggested that retirees could safely withdraw 4% from their portfolios annually over a 30-year retirement period without running out of money. This rule assumed a balanced portfolio of 50% stocks and 50% bonds, with annual increases in withdrawals to match inflation.

The Evolution of Withdrawal Strategies:

As with any rule, improvements and adaptations have been made over time. Researchers like Johnathan T. Guyton and William J. Klinger have contributed to the evolution of withdrawal strategies. Their studies suggest that with a more flexible approach, investors can aim for higher initial withdrawal rates.

Achieving a 6% Withdrawal Rate:

To achieve a 6% initial withdrawal rate, investors must be willing to adjust their asset allocation. A portfolio consisting of 80% stocks and 20% bonds and cash can support this higher withdrawal rate. However, flexibility is key to ensuring the longevity of your retirement income.

The Four Rules for Flexibility:

1. No Increase in a Negative Year: If the portfolio experiences a negative return, there is no increase in the annual income amount. This ensures protection during market downturns.

2. Adjust for Inflation: If the current withdrawal rate is within 20% of the initial rate, increase the prior year's withdrawal by the Consumer Price Index (CPI) or the inflation rate to keep pace with rising costs.

3. Cut Back in Poor Years: If the current withdrawal rate exceeds 20% of the initial rate due to market losses, reduce the next year's withdrawal by 10%. This "pay cut" helps preserve the portfolio during challenging times.

4. Raise Income in Good Years: If the current withdrawal rate is less than 20% of the initial rate due to market gains, increase the next year's withdrawal by 10%. This "pay raise" takes advantage of favorable market conditions.

Conclusion:

While a 6% initial withdrawal rate may offer the opportunity for earlier retirement or increased income in retirement, it comes with the requirement of flexibility. Adhering to the four rules outlined above can help ensure the sustainability of this approach. It's crucial to note that this strategy isn't without complexities, and seeking guidance from a financial professional is recommended. Additionally, maintaining a debt-free lifestyle is paramount for the peace of mind and adaptability needed for this approach. By carefully navigating the nuances of retirement planning, you can tailor your withdrawal strategy to better suit your financial goals and enjoy a more secure and fulfilling retirement.

Should I consider a Roth Conversion?

At Incline Financial Planning, our approach to serving clients is guided by our unique "Service Calendar." This calendar outlines the areas of focus for each month, and for November, our client's financial well-being takes center stage with a particular emphasis on Roth Conversions and Cash Flow Management.

At Incline Financial Planning, we are enthusiastic proponents of Roth accounts. The core principle of Roth accounts is that you pay your taxes upfront when contributing to them, and subsequently, your investments grow tax-free, with the added benefit of tax-free distributions in the future. What we consider to be the most significant advantage of Roth accounts is the level of certainty they provide regarding your future tax rate, which is 0%. In contrast, traditional retirement accounts, like 401(k)s, are subject to taxes upon withdrawal, and predicting future tax rates can be a daunting task, as history has shown fluctuating and at times, very high personal income tax rates.

Our primary objective in November is to help our clients evaluate whether it's advantageous to convert funds from a retirement account with tax-deferred income into a Roth IRA. This process entails evaluating whether paying taxes on the converted amount today makes sense, thereby allowing those funds to grow over time without future tax consequences. The primary driver of this decision is how much are you willing to pay in taxes today to guarantee the tax-free growth and distribution of those funds for you and your heirs' future.

The strategy of Roth conversions can be intricate, with several moving parts. Drawing on our background in aviation, where complex environments demand precision and organization, we find it valuable to employ checklists and flowcharts. Specifically, we utilize two essential flowcharts to assist clients in making informed decisions. The first flowchart, titled "Should I consider a Roth Conversion?", guides clients in assessing the suitability of a conversion for their specific circumstances. The second flowchart, "Will My Roth IRA Conversion Be Penalty-Free?", helps clients understand potential penalties and restrictions associated with their conversion.

If you're interested in determining whether a Roth Conversion aligns with your financial goals and needs, we invite you to sign up for a complimentary financial plan. This personalized plan will consider your unique financial situation and help you make an informed decision about Roth conversions.

Where Should My Next Dollar Go?

It's common to experience a sense of uncertainty or stress when it comes to managing your finances. The question of "Where should my next dollar go?" can become a source of confusion without the right guidance. This could lead to potential pitfalls like inefficient use of funds, overspending, or simply leaving too much of your hard-earned cash sitting idle in the bank.

We believe that financial clarity and confidence can be achieved when you are actively engaged in discussions about your financial order of operations. This refers to the specific, strategic pattern you use to allocate resources to meet your unique goals and preferences.

Our flowchart has been carefully designed to guide these important conversations between yourself and your financial advisor. By using this tool, all the key aspects of your financial circumstances can be considered, allowing you to gain a holistic view of your financial situation.

First, the flowchart takes a comprehensive view of your overall financial security. It helps you assess the sufficiency of your emergency funds, evaluate your financial solvency, and confirm your insurance coverage is adequate.

Moreover, we understand that you may be able to access what we often refer to as "free money" through your employment. Our flowchart ensures you are leveraging these employer benefits to their fullest.

The process's next step is identifying and prioritizing your financial goals. These could range from retirement, saving for the kid’s college, and particular objectives to broader financial planning ambitions. Whatever your plans, our flowchart can help you envision a clear path towards them.

Last, the flowchart also examines the specific accounts or strategies that could further help achieve your financial goals. Remember, this flowchart is not just a tool; it's a vehicle for you to engage in a more meaningful discussion about your financial journey, making you more involved and more confident about where you're headed. To everyone in their 20s to their 50s and beyond, it's never too late or too early to gain control of your financial future. Let's make it a collaborative and enlightening conversation!

Here's to securing your financial future, one dollar at a time. Check out the “Where Should My Next Dollar Go” flowchart.