What Is the Safe Withdrawal Rate (SWR) Method?

🍬The safe withdrawal rate (SWR) method is a way retirees can calculate▨ how much money they can use from their accounts each year without running out of money.

The safe withdrawal rate method is a conservative approach that tries to balance having enough money to live comfortably without depleting their retirement savings prematurely. It is based largely on the value of the individual's 澳洲幸运5官方开奖结果体彩网:portfolio at the time they retire.

Opinions differ but most financial advisers say that you can safely spend 3% to 4% of the total balance in your retirement fund at the time of your retirement, adjusted annually for inflation. If invested conservatively, that𓆏 means you should be spending mostly the returns on your investments, not the principal in your account.

Understa𝓡nding the Safe Withdrawal ꦺRate (SWR) Method

There are many unknowns to calculating how much you can withdraw from your retirement savings. They include how the market will perform, how high 澳洲幸运5官方开奖结果体彩网:inflation will be, whether you need to meet extraor🐲dinary expenses, and your life expectancy.

The longer you expect to live, the longer the time you need to stretch your savings, which means you may experience still more unknowns, or factors that you can't control.

The Worst-Case Scenario

The safe withdrawal rate method tries to prevent worst-case scenarios from happening by advising retirees to take out only a sm🅘all percentage of their assets each year, typ🌼ically 3% to 4%.

Knowing what safe withdrawal rate you’d like to use in retirement also informs how much you need to save during your working years. If you want to withdraw more money per year, then clearly you'll need to have more money saved.

However, the amount of money you mig🐬ht need to lജive on might change throughout your retirement. For example, you might want to travel in the early years and, therefore, need more money then. Your safe withdrawal rate might be structured so that you would withdraw 4% in the early years and 3% in the later years.

How to Calculate the Safe Withdrawal Rate

The safe withdrawal rate helps you determine a minimum amount to withdraw in retirement to cover your basic expenses, such as rent, utilities, and food. As a rule of thumb, many retirees use 4% as their safe withdrawal rate—the so-called 4% rule. 

The 4% rule states that you withdraw no more than 4% of your starting balance each year in retirement, adjusted each year for inflation. This doesn't guarantee you won't run out of money, but it does help your portfolio withstand market downturns by limiting how much is withdrawn. In this way, you have a much better chance of not running out of money in retirement.

Al♉though there are a few ways to calculate your safest withdrawal rate, the formula below is a good start:

• Safe withdrawal rate = annual withdrawal amount ÷ total amount saved

Let’s say as an example, you have $800,000 saved and you believe you’ll need to wiಞthdraw $35,000 per year in retirement. The safe withdrawal rate would be: 

• $35,000 ÷ $800,000 = 0.043 or 4.3% (or .043 * 100)

If you believe you'll need a higher or lower amount of income in retirement, here are a few examples:

• $25,000 ÷ $800,000 = 0.031 or 3.0% (or .03 * 100)
• $45,000 ÷ $800,000 = 0.056 or 5.6% (or .056 * 100)

So, if you only needed $25,000 per year in withdrawals, you could safely withdraw it si🗹nce it 🎃would only be 3% of your balance each year.

If you believe you would need $45,000 per year in retirement and you want to ཧonly withdraw 4% of your retirement balance, you would need to save more money. In other words, $45,000 per year in withdrawals from a balance of $800,000 would yield a 5.6% withdrawal rate, which might lead you to run out of money.

To calculate how much in retirement funds you'd need to satisfy the 4% rule and be able to safely withdraw $45,000 per year, we would rearrange the formula as follows:

• Annual withdrawal amount ÷ safe withdrawal rate = total amount saved
• $45,000 ÷ 0.040 = $1,125,0000

Now you know that you would need to save an additional $325,000 beyond your c𒁃urrent balance of $800,000 to be able to satisfy the 4% rule and withdraw $45,000 per year safely.

If you lower your withdrawal rate–all else being constant—your funds will last longer. However, if you want a higher withdrawal rate, you'll need to be sure that there will be enough funds to last 20 to 30 years since you might run the risk of depleting your funds.

Limitations of the Safe Withdrawal Rate Method

A shortcoming of the safe withdrawal rate method is that it is dependent on 澳洲幸运5官方开奖结果体彩网:economic conditions at the time you retire. A 4% withdrawal rate may be safe for one retiree yet cause another to run out of money prematurely, depending on factors such as 澳洲幸运5官方开奖结果体彩网:asset allocation and investment returns during retirement.

Retirees shouldn't be overly conservative in choosing a safe withdrawal rate. It could mean settling for a lower standard of living than is necessary.

Alternatives to the Safe Withdrawal Rate Method

Using the safe withdrawal rate method means keeping your savings steady through the years, in good and bad economic times. That's risky, and can increase the 澳洲幸运5官方开奖结果体彩网:possibility of failure (POF) rate, or the percentage of simulꦰated portfolios that fail to last a lifetime.

An alternative to the safe withdrawal rate method is 澳洲幸运5官方开奖结果体彩网:dynamic updating. This allows for a regular reevaluation of your withdrawal amount based on changes in inflation or 🐎your portfolio'sღ value.

The Bottom Line

The safe withdrawa🦩l rule is a classic in retirement planning. It maintains that you can live comfortably on yourꦺ retirement savings if you withdraw 3% to 4% of the balance you had at retirement each year, adjusted for inflation. Assuming your money is invested conservatively, you should have a steady income for about 30 years.