What is the Safe Withdrawal Rate in Retirement? - 12/14/23.
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Yep. Like every study since 1994, itâs 4%.
I agree that retirees tend to spend less as they continue in retirement. But Iâve found that a lot of that is just that you become more efficient in your spending. For example, a retiree can schedule a cruise during a period when prices are lowest. Someone working likely has to schedule vacation travel at a higher cost according to the whims of the bossâs schedule.
intercst
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The article doesnât mention using the IRSâ Uniform Lifetime Tables in its Safe Withdrawal Rate discussion. In addition, there seems to be a tacit assumption that all withdrawals are used for non-discretionary and discretionary consumption.
Why would it? The Uniform Lifetime Tables donât have anything to do with actually withdrawing the money from your portfolio. They are used in conjunction with taking RMDs from retirement accounts, but just because you take money out of a retirement account doesnât mean that you are taking it out of the portfolio. You can redeploy the RMD back into your taxable account, which is still a part of your portfolio. Since money is fungible, you can use other funds to pay any taxes due on the RMD.
Iâm not sure why you would take money out of your portfolio if you werenât going to use it for some type of consumption. Seems like if you werenât going to use the money, youâd leave it in the portfolio.
AJ
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@aj485: The article that @FlyingCircus referenced used the following definition for SWR
Blockquote The safe withdrawal rate is the percentage of your retirement savings that you can withdraw each year (adjusting annually for inflation) without running out of money in retirement.
I interpret that to mean any accounts specifically designated as being for retirement, e.g. traditional IRA accounts. Does anyone actually include taxable investment accounts, Roth IRA accounts, and the value of rental properties when calculating their initial SWR?
Under the 4% SWR, I would need to withdraw $94,121.77 from my IRA accounts in 2024; however, the Uniform Lifetime Table requires me to withdraw $138,348.38 from the same accounts in 2024. Thatâs an additional $44,226.61 that Iâm required to withdraw from my IRA accounts.
I do reduce the taxable RMD using a QCD to Friends of the NewsHour for $25K. The remainder of the RMD is transferred to my taxable investment account from which I distribute the annual gift exclusion to each of my three children. The gifts will total $54K in 2024. The remaining $59K will sit in the accountâs sweep bank account earning nearly nothing until I decide what to do with it.
As a disabled Vietnam Era veteran, I receive $5,442,39/mo from Social Security Workers Retirement and VA Disability Compensation plus $985.36/mo from two pensions. This is more than enough to cover my non-discretionary expenses (taxes, housing, clothing, and food) and discretionary expenses for the time being.
Taxable investment accounts, Roth IRA accounts, and real estate holdings can be used for expenses in retirement but why would you use them for determining an SWR? And, when would you do this? At the time that you retired or when RMD started? I used cash held in bank and credit union accounts from the time that I retired until RMD withdrawals started.
That may be your interpretation, but as I have often said on these boards, âretirement savingsâ does not have to be in a âretirementâ account, like a Traditional IRA. In fact, I have often recommended that those who are planning for retirement should have 3 different types of accounts:
- Traditional IRA/401(k)
- Roth IRA/401(k)
- Taxable brokerage
This allows flexibility in picking which accounts you take your retirement income from in order to structure taxes in retirement.
Note: If you have other income producing assets, like rental properties or a business, those certainly need to be included in your retirement planning, too.
Until you indicated that you donât, I didnât know of anyone who didnât. Sure, people may set aside some specific assets for, say, college costs for their kids, to pay off their mortgage, or to buy a vacation home, and not count those assets toward their retirement savings. But once you retire, why wouldnât your entire portfolio be available to use for expenses in retirement, which is what âretirement savingsâ are for?
There is no 4% SWR need to withdraw - the SWR tells you the maximum that you can safely withdraw if you plan to have your portfolio last at least 30 years. The need for portfolio withdrawals in retirement is based on what your expenses that arenât covered by income thatâs not from your overall portfolio. If you have enough income from pensions, SS, real estate rentals, etc. to cover all of your expenses, then you donât have to take any income from your portfolio.
And as I previously said, just because you take an RMD out of your retirement account doesnât mean that itâs being taken out of your overall portfolio. It can easily go into a taxable brokerage account.
Well, since the SWR study was based on stock/bond holdings, I certainly wouldnât count real estate holdings when determining a SWR. But exactly because the SWR study was based on stock/bond holdings, why would you not include your overall portfolio as a part of your SWR calculation? If you start out taking 4% from your Traditional IRA, but 10% from your taxable and Roth accounts, so that you are taking out 7% of your overall portfolio, youâre likely to run out of money well before 30 years is up.
To be clear, retirement planning is just a plan on how you will be able to cover your expenses in retirement. You make an estimate of how much you think you will be spending and determine how much will be covered by:
- pensions
- SS
- annuities
- rental real estate income
- any other income sources not tied to your portfolio
Any expenses that are left are what needs to be covered any withdrawals from your overall portfolio, including:
- asset sales
- dividends
- interest
- IRA/401(k) withdrawals (both Roth and Traditional) that arenât re-deployed into your portfolio
If what you need to take out of your portfolio to cover those expenses is less than the SWR calculation, then your portfolio is likely to last at least 30 years. If what you need to take out of your portfolio to cover those expenses is more than the SWR calculation, then you are likely to run through your portfolio in less than 30 years.
Whenever you wanted to start taking money out of your portfolio to cover your retirement expenses.
Well, you were taking money out of the cash portion of your overall portfolio. Did it start out as more or less than 4% of your overall portfolio annually?
AJ
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When I retired in 2013, I only had 249 shares of Comcast that were spun off from the 200 shares of AT&T that I had purchased in the Seventies and 150 shares of BRK.B from the 50:1 stock split. The market value of my holdings in my taxable investment account was $26K. Not worth bothering with given that I had $1.3MM in my traditional IRA accounts after taking a lump sum distribution from my pension.
Sorry that you didnât understand the impacts that confining your retirement savings to Traditional accounts would cause you down the road. I know that there were a number of discussions about the large RMD issue on the original TMF boards as long ago as 2006 (not that you can read them any longer), because that was when the law limiting Roth conversions based on income was changed.
That said, just because it was your choice to pretty much limit your portfolio to a single type of account doesnât mean that âsafe withdrawalsâ are calculated only on Traditional IRAs, rather than oneâs overall portfolio.
And thatâs why there is no reason to conflate RMD amounts with safe withdrwal amounts. They are two completely separate calculations.
AJ
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The SWR doesnât know about RMDs and vice versa. You probably should have been spending down your IRA instead of the cash in order to minimize your future RMDs.
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I retired after turning 68 and emptied my 401(k) with a NUA (Net Unrealized Appreciation) withdrawal before turning 69. At 70, I started RMD after the market value of my traditional IRA increased by 186% after retiring. Given the tax rates in 2014, Iâm not sure that a withdrawal from my traditional IRA in that year would have a significant impact on future RMD withdrawals.
I agree that SWR and RMD are different; however, my contention is that you will need to adjust your SWR to reflect the impact of RMD on accounts subject to RMD withdrawals.
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I think the confusion is with the word âwithdrawal.â Even though you are withdrawing money from your IRA, you donât have to withdraw that money from your overall portfolio.
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Or, stated another way, whatever remains of the RMD after taxes are paid can be invested outside the IRA in a regular brokerage account, where you will have to start paying attention to things like capital gains (short and long term) as well as dividends being taxed. (All my investments are in an IRA or ROTH, so those things havenât ever concerned me yet. Iâm still a couple of years from RMD.)
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Agreed! I think SWR should be re-named SSR - safe spending rate. (not really, but you get where Iâm coming from). âWithdrawingâ from the IRA but investing it in a taxable account is not âwithdrawingâ it from your overall portfolio, nor is it spending it.
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No, you are still confused.
Taxes, which are an expense, have to be paid on the RMDs, so your total expenses will have to be adjusted to include those taxes. How much your expenses are has absolutely nothing to do with having to âadjust your SWRâ.
As already explained multiple times - the SWR has to do with how much can be taken out of your portfolio if you want your portfolio to last at least 30 years after you started those withdrawals. It is a cap on how much you can take out of your portfolio, not a floor. If you donât want to take the entire SWR amount out of your portfolio, thatâs fine - you donât need to.
Problems with your portfolio survival can arise if you want to take more than the SWR amount out of your portfolio. So, if the expenses you have (including the taxes on the RMDs), are more than the SWR amount calculated for your portfolio, then you need to be looking at how you can adjust your expenses, or find sources of income to fund your expenses from someplace other than your portfolio.
The SWR amount is based on only your total portfolio amount, how itâs invested and the length of time that you want the portfolio to last. It is completely independent of how much you need or want to spend. If you donât want your portfolio to run out of money during the timeframe youâve set, you should be adjusting your expenses and/or other sources of income.
The SWR is what it is, no matter what your expenses are. As Charles Dickens said in David Copperfield:
âAnnual income twenty pounds, annual expenditure nineteen nineteen and six , result happiness.
Annual income twenty pounds, annual expenditure twenty pounds ought and six, result miseryâ
AJ
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Yes, Iâm confused. I had assumed that SWR was to cover the shortfall between income and expenses. Living Expenses includes all federal and state income taxes plus local property taxes.
Guaranteed Income + RMD - Living Expenses = Shortfall
When Shortfall is negative money needs to be withdrawn from your portfolio to satisfy the difference. When positive the Shortfall is returned to the portfolio.
I had equated Shortfall to SWR. After reading an Investopedia article on SWR I learned that SWR uses the portfolio to fund all Living Expenses and ignores pensions, Social Security, and other guaranteed sources of income.
I played with FireCalc shortly after retiring. It determined that RMD was a SWR after adding in income from pension, Social Security, and VA Disability Compensation.
Hi @MCCrockett,
Letâs change your calcs a little.
I have always used:
Guaranteed Income - Living Expenses = Shortfall
This gives you the amount of cash that your portfolio must provide. The cash can be via RMD, a normal withdrawal or a combination.
The SWR applies to the portfolio vs the Shortfall amount.
The RMD is nothing special as far a money goes. It is simply an amount of money the ârulesâ say Must Be Removed from traditional retirement account.
The RMD, if excess to your Shortfall amount, can simply be reinvested in a taxable account. In that case, only a portion of the RMD is actually withdrawn from the portfolio. That portion is just reloacated from one account to another (IRA to taxable).
Does that help you?
Gene
All holdings and some statistics on my Fool profile page
https://discussion.fool.com/u/gdett2/activity (Click Expand)
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Got a link to that article? Because thatâs not right either. I donât know if you are misinterpreting, or if the article is incorrect (as I have found Investopedia articles to be sometimes).
So, letâs go back to the definition you cited upthread:
There is NOTHING in that definition about your expenses or how much you NEED to pull out of your overall portfolio. Itâs just how much CAN BE pulled out of your overall portfolio safely so that your portfolio balance wonât go to zero during your retirement timeframe, generally starting at 30 years - you can adjust this to your specific circumstances.
Thereâs a good chance that you will end up with more money than you started with at the end. But if you draw the bad luck card and your retirement timeframe mimics the worst set of historical years, you will end up at a near zero level at the end of your timeframe, but still should not run out of money.
First, I would point out that RMDs are also a form of guaranteed income, since you are required to take them out of your retirement account. That said, you need to take RMDs, dividends and interest from your portfolio out of the equation and just consider non-portfolio sources of income as a part of the âguaranteed incomeâ - and then to add a 2nd step to your equation. To paraphase Dickens:
âSWR amount - shortfall > 0, result happiness
SWR amount - shortfall < 0, result misery"
AJ
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Perhaps, my issue is that I donât consider my traditional IRA for tax purposes until I transfer RMD-QCD to a taxable brokerage account. This plus pensions, Social Security, VA Disability, interest, dividends, and expected capital gains defines the annual income available to cover my expected annual living expenses.
If annual living expenses exceeds annual income, I will need to withdraw money from my taxable brokerage account or from my traditional IRA to cover the shortfall. Since 2015 when I started RMD withdrawals, I have not needed to withdraw any additional funds from my taxable brokerage or traditional IRA accounts.
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That article has a lot of problems. In just one sentence, here are some of the issues:
The safe withdrawal rate helps you determine a minimum amount to withdraw in retirement to cover your basic need expenses, such as rent, electricity, and food.
The safe withdrawal rate is the maximum amount that can be withdrawn if you donât want your portfolio to run out of money in retirement, not the minimum.
Then, it fails to consider that nearly all retirees in the US have at least one other form of income - SS - that will help pay things like rent, electricity and food. Many retirees have additional sources of income, like pensions, rental income, annuities, etc. that can also be used to pay those expenses. (On the other hand, there are some retirees who rely totally on SS and donât need to worry about SWR calculations, because they have no portfolio.)
Another sentence in that article is just plain wrong:
The 4% rule states that you withdraw no more than 4% of your starting balance each year in retirement.
Thatâs not correct. The SWR calculation is to start your withdrawals with up to 4% of your original portfolio balance, and then adjust the dollar amount of the withdrawal that you take by inflation each year. It does not limit you to 4% of the original portfolio balance each year.
There are more issues with how the article discusses the SWR, but suffice it to say that the author of the article does not have a complete understanding of what the SWR is, nor how it is used.
Itâs not about taxes. Again, a SWR does not care about what your expenses are, what your RMD is or what your taxes due to your RMDs will be. A SWR is only to calculate how much you can take out of your overall portfolio if you want your portfolio to last for a particular timeframe, like how long you want to plan for your retirement.
Put another way: Your expenses have NOTHING to do with what your SWR is. Only the size of your portfolio and how long you want it to last.
Your overall retirement plan should balance what you expect your expenses to be vs. what you expect your income to be, including pensions, SS, rental income, and what you can safely pull from your portfolio.
There, fixed that for you. It doesnât matter if itâs from your brokerage account or your IRA - both are part of your overall portfolio, along with any other types of stock/bond investments that you have. And, as stated multiple times in this thread, just because you are taking an RMD from your IRA doesnât mean that it is a withdrawal from your overall portfolio. If you just move the RMD from your T-IRA to your taxable brokerage account, the money is still a part of your overall portfolio.
If what you are withdrawing from your overall portfolio exceeds the SWR calculation, then you could be in danger of running out of money before you run out of retirement years.
AJ
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Ignored this as I knew that SWR was the maximum amount.
This is a common problem with all articles regarding SWR. They provide no guidance on what expenses you might need to cover when determining your SWR. It is interesting to note that FIRECalc and other calculators want you to supply the amounts and start dates of pensions and Social Securities in addition to your initial portfolio value and asset mix to calculate your SWR. However, there is no guidance on determining how much you need to receive annually.
I concede that you are correct with regard to SWR; however, I did run across a dated brief from the Center for Retirement Research at Boston College that indicates RMD is a more efficient withdrawal strategy than SWR because it consumes more of your portfolio.