Withdrawal “Symptoms”

I was recently asked about the so-called 4 percent “rule.” That’s the rule of thumb(1) that many financial consultants rely on as a formula for how much money can be withdrawn from retirement savings every year (generally adjusted for inflation) without running out of money. Of course, like so many of the “assumptions” about retirement, certainly in the aftermath of the 2008 financial crisis, that withdrawal rule of thumb has drawn additional scrutiny.(2)

At the time, my comment was that the 4 percent guideline is just that—a guideline. What’s not as clear is whether adhering to that guideline produces an income stream in retirement that will be enough to live on.

How much are people actually withdrawing from their retirement accounts? At a recent EBRI policy forum,(3) Craig Copeland, senior research associate at the Employee Benefit Research Institute, explained that the median IRA individual withdrawal rates amounted to 5.5 percent of the account balance in 2010, though he noted that those 71 or older (when required minimum distributions kick in) were much more likely to be withdrawing at a rate of 3–5 percent (in 2008, that group’s median withdrawal rate was 7.2 percent, but in 2010, it was 5.2 percent), based on the activity among the 14.85 million accounts and $1 trillion in assets contained in the EBRI IRA Database.(4) Will these drawdown rates create a problem down the road? Will these individual run short of funds in retirement?

At its core, once you stipulate certain assumptions about the length of retirement, portfolio mix/returns, and inflation, a guideline like the 4 percent “rule” is really just a mathematical exercise.

However, trying to live on the resources you actually have available in retirement is reality—and those post-retirement withdrawal decisions are generally easier to make when you’ve made good decisions pre-retirement.

- Nevin E. Adams, JD

(1) Certified financial planner William P. Bengen is frequently credited with the concept, based on his article “Determining Withdrawal Rates Using Historical Data,” published in the October 1994 issue of the Journal of Financial Planning.

(2) It had drawn criticism before the 2008 financial crisis as well: See “The 4% Rule—At What Price?”

(3) The agenda, presentation materials, and a recording of EBRI’s May policy forum are available online here. Dr. Copeland’s presentation is online here.

(4) The results come from 2010 data in the EBRI IRA Database,TM which had 14.85 million accounts, held by 11.1 million individuals, with $1 trillion in assets—roughly one-fifth of both owners and assets in the IRA universe.