Keys With Drawdown Strategies
OCEAN CITY -- Nearly two decades ago, financial planner William Bengen made headlines when he suggested that retirees could withdraw 4% of their portfolios each year, plus adjustments for inflation, and still have enough to last 30 years or more. Since then, that rule of thumb has become standard. But “there is really no ‘standard’ or ‘right’ withdrawal rate,” says Anil Suri, managing director and head of Investment Analytics at Bank of America Merrill Lynch.
Here are two of the questions to consider with your Financial Advisor as you develop a strategy for withdrawals in retirement.
How long will you need the assets to last? The amount you can comfortably draw down each year will depend on the total amount of your assets, your age at retirement and your life expectancy, which, in turn, will be influenced by a host of other factors, such as gender, health and family medical history. For example, women tend to live longer than men,2 so a 75-year-old man could probably spend a bit more than a woman the same age and be reasonably confident that he will not run short. Couples, on the other hand, whose joint nest eggs must last through both their lifetimes, would need to draw down more conservatively than a single man or woman.
How much risk can you tolerate? Appetite for risk, of course, has a big influence on the drawdown equation. A 55-year-old woman who wants to be sure her wealth will outlast her may need to watch her outflows more closely. If she were able to tolerate more risk — for example, if her pension income covers her essential expenses — she would be in a position to increase her withdrawals and spending.
Your degree of comfort with risk will also determine how you allocate your portfolio. Different investments will appeal to different types of people, but ideally you may want to consider holding a combination of equities and fixed income. For example, a younger investor who is able to bear more risk can consider a substantial allocation to equities. But an older investor who has less time before drawing down assets may want to allocate some of the portfolio to products that offer principal protection or guaranteed lifetime income. Your financial advisor can work with you to map out different allocation strategies and show you the hypothetical probability of success for each one.(A Merrill Lynch Wealth Management Advisor. He can be reached at 410-213-8520.)