How do you know if you’ve created a sufficient nest egg to last throughout your retirement?
Assuming you have, how should it be invested to maximize the opportunities of it lasting as long as you do? If you have these questions you’re not alone. Financial planners have been wrestling with this topic for as long as there have been financial planners. Now, thanks to some innovative and creative work by David Zolt, a leading thinker in the industry, we have some answers. All you need to know to get started is the obvious: how big is your nest egg and how long do you need it to last? Easy, right? With these two key data points you can use the lookup tables below to find a percentage of your nest egg withdrawal that can be used for your first year of retirement. The tables provide you with various degrees of confidence levels that you can use when deciding which percentage but I recommend sticking with the highest level of 95%. Nothing is ever guaranteed when it comes to predicting long-term inflation adjusted spending so using the highest realistic confidence level seems to make practical sense for this exercise.
Highest Initial Withdrawal Rate Table
(Table 1 source: https://www.onefpa.org/journal/Pages/OCT14-Retirement-Planning-by-Targeting-Safe-Withdrawal-Rates.aspx)
Now something else important to remember is that simply having an understanding of a reasonable withdrawal percentage and sticking to it will still leave you far short of maximizing your odds of having a long-term positive investment experience. You see as much as we hear over and over again the age-old investing wisdom of “buy low – sell high” most of our brains are simply not hardwired to do this very easily. Look at this piece from Dimensional Fund Advisors that displays how “Humans are not Wired for Disciplined Investing.”
Another key idea emanating from Zolt’s work is the idea that inflation adjustments to your retirement withdrawals (or lack thereof) will be a key determinant of your longevity’s longevity. Are you the type that feels most comfortable with an inflation adjustment every year thereby keeping 100% of your purchasing power intact? Or perhaps you’re willing to forego some inflation adjustments in exchange for a higher starting withdrawal amount? We can now quantify this tradeoff.
This type of planning and strategizing can be done by DIY’ers but understand that fatal yet preventable mistakes are made all the time by well-intentioned retirees who fail in one or more key areas.