Good Financial Reads: Managing Money in Retirement

Last week we discussed the basic rationale for developing a safe withdrawal rate. Historically, balanced portfolios have been able to sustain withdrawals of at least 4% of initial value, adjusted for inflation — “the 4% rule.” However, most of the time, higher rates are sustainable. But how can we know if a higher rate is sustainable? This week we look at what determines differences in withdrawal rates and suggest ways to monitor performance to balance the need for safety with the ability to spend more from the portfolio. 

For most people, healthcare is an employer-provided benefit during your working years. Unless you’re self-employed, you’ve probably received healthcare benefits from an employer. At retirement, that may change. It’s crucial to understand how much healthcare costs in retirement and how you’ll pay for healthcare in retirement.

With this information, you’re better prepared to plan, and you’ll understand how to save for healthcare costs. 

You may have heard that withdrawing 4% of your initial portfolio value adjusted for inflation each year is a safe strategy to make sure your savings last through retirement. But where does the 4% come from? And is this still a good rule?

How much you can withdraw from your savings over time depends on the amount you have saved, your planning horizon, and the returns you are going to experience over time. The more you have saved, the shorter the time horizon, and the greater the returns over time, the greater the amount you can withdraw. What makes things complicated in retirement is that we don’t know future returns or the length of the planning horizon.