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Predetermined percentage withdrawals

July 10, 2018

The previous blog gave a prescription for retirement income withdrawals. A few people emailed me asking why I didn’t recommend a predetermined percentage withdrawal rate such as 4% a year or a similar percentage. Here are some of my reasons.

  1. My blog gave a plan of how to withdraw the money and where it should come from, not how much should be withdrawn.
  2. My blogs suggest that all plans should be based on needed cash flow and the asset base that will provide it in addition to the other sources of retirement cash flow such as Social Security.
  3. I also provide suggestions of what to do if there is a short fall of cash flow.
  4. I do not believe predetermined formulas work; and consider that one of the many of the clichés that I wrote about in the May 15, 2018 blog.
  5. Each person is different and a cash withdrawal plan should be customized based on their entire circumstances. I do not think that using a predetermined formula would work in most situations or that it would really provide the necessary cash flow and financial security most retired people need.
  6. Formula provisions are based on current short term and long term interest rates and investment yields and depend on the asset allocation and a predetermined rebalancing formula (which I do not think works), asset location in taxable and tax deferred accounts, estimated stock market dividend rates and growth, or ugh, declines, the amount of any part time income, life expectancy of the retiree and their spouse, if married, whether an investment manager is engaged and the economy, inflation and tax rates. Too many moving parts to be locked into a predetermined formula that really has no basis for most individuals that retire or are retired.

Preparing and planning for your future financial security takes thought, effort and work to give you a chance for it to be right. If you cannot do it yourself, find the right advisor who will treat it with the proper care you deserve, and need. Do not be misled by clichés or canned formulas.

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