In an article about retirement withdrawal strategies, Richard Connor looked at a variation I'd never seen before where the idea is to mirror the IRS tables for Required Minimum Distributions (RMDs). The most common approach to retirement withdrawals, more like the most common philosophy, is the 4% rule which says in your first year of retirement you take 4% and then adjust up every year by the rate to inflation so if inflation runs at 3% you'd take 4.12% the second year and then reevaluate every year thereafter.
It's difficult for me to believe too many people pull out the CPI number and then adjust their withdrawal up by that amount. If you know anyone who does that please let me know. What is more realistic is people who take a regular distribution start with some fixed number that's somewhat close to 4%...maybe...stick with that as long as is practical and then at some point that dollar amount will change based on client need and chances are that number will go up, not down.
What I've written about as building block is whatever you got, 4%. That's a slight tweak on the 4% rule that throws out the inflation math because as the portfolio goes up, as it inflates, it will hopefully keep up with inflation. The more practical application would be 1% of your balance every three months.
The RMD strategy that Connor wrote about might be thought of as a middle ground between those three ideas. The way this works is you look at an RMD table, look at your age and divide your portfolio by the factor associated with your age. The amount you take goes up every year as your life expectancy decreases. With a $500,000 portfolio, at 72 you'd take $18,248 ($500k/27.4) and with the same amount at 92 years old you'd take $49,019 ($500k/10.2). At 114 years old, you'd take half of what is left.
You have to take the RMD if you have a traditional/rollover IRA. You don't have to spend the money, you just need to make the withdrawal from the IRA so the government can collect taxes from you.
Scaling up your total portfolio income up in line with the RMD table makes sense math-wise. If you make it close to 90 and have been able to stay on plan with your withdrawals with no plan-altering large expenses then you can get away with taking more out.
I do question how practical this is though from one standpoint which is that retirees tend to spend more money early on in retirement, then spend less as they get older and then spend a lot more when they are considerably older and most likely to need some sort of long term care. If I am reading this link correctly, 37% of us will need some sort of care from checking into a facility. A long time ago, there was a rule of thumb that long term care facilities were designed to take your last $200,000. With inflation, maybe that's now $300,000.
Quick detour: no one wants to end up in a facility. Our best chance for avoiding that outcome is to lift weights to avoid becoming physically frail and to greatly reduce carbohydrate consumption to avoid getting sick. Carb consumption has been studied in conjunction with every malady there is. You should draw your own conclusion but I've said many times before that I am living my life in belief that sugar, not anything else (other than cigarettes and drugs), are at the root of all medical conditions. Don't take my word for it but there is endless research for you to find and learn from to draw your own conclusion.
Tying in a rule of thumb I made up, being 85, healthy and out of money is a tough spot to be in. Money is optionality. In the phase of life we're talking about that optionality can protect against the unexpected. You could be otherwise fit and healthy but have something medical come up that for whatever reason is expensive out of pocket. It will become increasingly common that 70 year olds will have to care for their 100 year old parents. You may want to move closer to someone (family) or something (National Park or hobby center) which ends up being expensive to do. Maybe you want to invest in a grandchild's startup which might be more of an act of love than a true money maker.
These sort of life events are why I write about optionality so frequently. You never know what you'll want to do in the future or what you'll have to do. While things like the 4% rule and the other variations are handy, my wife and I hope to be as independent from our portfolio as possible if/when we "retire." Things like post retirement gigs monetizing hobbies or some sort of passive income if you're lucky enough to create that sort of stream or finding work you don't want to retire from all serve to reduce the burden off of your portfolio which gives you more optionality later.
A scenario of retiring healthy at 65 to do some sort of fun work that covers your expenses without needing to take from your portfolio or take Social Security is a great spot to be in. Especially if you love the endeavor and stay healthy enough to do it for awhile.
Just a couple of good decisions/habits early on can get you to that outcome. I of course concede that plenty of people do not want that outcome because it probably means dying with a lot of money in the bank. You've shorted yourself somehow, the thinking goes by dying with a lot of money. There's value in enjoying your money but there is also value in knowing you're financially resilient. I would encourage knowing the difference so you can choose what's best for you.
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