subject: How Much Money Can You Safely Withdraw From Your Investments? [print this page] Its a common misconception that in order to have enough money to get through the rest of your life, you want a withdrawal rate of no more than 4-6% of your investment account(s). Maybe you are following this so-called rule right now.
I dont argue with the science or research behind the 4-6% rule. However, when you apply it to the real world; I think it is just a little bit flawed.
A 4-6% withdrawal rate is a one-size-fits-all solution it doesnt really consider YOU and your individual situation. It doesnt take into account how old you are, your current health situation, your familys health history, your life expectancy or your inheritance goals.
Inheritance goals are simply how much money you plan to have left over to pass on to your heirs. Some people see having a specific minimum amount the kids or charities to inherit as their definition of success. There are others who never want to be a financial burden to anybody, especially the kids, but want to use and enjoy their money even if theres not much left for the kids to inherit.
Naturally, how you view your own inheritance goal can have a significant impact on what your actual withdrawal rate could be from your investments.
If your goal is to keep your account balance in place if not allow it to grow over time maybe 4-6% is a worthwhile target, although you still have to factor in your life expectancy and health situation.
But if leaving your family or other heirs large sums of money isnt a primary concern, then 4-6% may be too low! 4-6% will probably force you to make sacrifices down the road, and you may eventually realize you could have done other things and had even more enjoyment had you allowed yourself some extra money.
If your inheritance goal is to enjoy life, while never being a financial burden, even if theres not much left over to inherit by others, that probably means youre okay spending some of your principle later in life. As long as you spend it in a gradual controlled manner, with a safety cushion, so that you never run out of money during no matter how long you live.
Now you know why I think its a huge mistake for anybody to just set it and forget it. The better approach is to first determine what is it you want to accomplish in your life with your money something some people would call that goals or milestones that make up what we call a financial roadmap. And then, give that plan or strategy a periodic stress test.
Think of your money as a pension fund. Unless you need all of your money today, the amount you have on any given day really isnt the most significant issue. The most significant issue is do you have enough money to generate the income stream or withdrawal rate that you need or desire from your money?
If you think of your investment account as a pension fund, and your pension fund is over funded, that tells you that you have a surplus chunk of money so youve got choices. You can increase spending, give more money to family or charity, or, you could adopt a lower risk investment strategy. After allwhy take risks you dont have to?
Conversely if you are underfunded, it doesnt mean you are running out of money or that you have to reduce your spending. You simply need to continue monitoring, and down the road, maybe reduce spending or increase investment risk by putting more money into growth opportunity areas or some combination of those things.
The probability that you will be able to live life on your terms is going to change based in part on the financial market. But you may find that your attitude and outlook on life changes as well. And its good to be able to have some flexibility so that you can adapt to change.
Copyright (c) 2010 Brian Fricke
by: Brian Fricke
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