Planning for retirement involves envisioning a time of freedom, relaxation, and the pursuit of passions. However, it is crucial to meticulously plan your finances to ensure a secure and comfortable lifestyle during your golden years. This is where the concept of the safe withdrawal rate (SWR) comes into play.
The safe withdrawal rate (SWR) is a tool that helps retirees determine how much they can withdraw from their portfolio annually, without depleting it over the course of their retirement. It allows individuals to withdraw a calculated percentage of their portfolio value each year.
The primary goal of the SWR is to strike a balance between enjoying retirement and ensuring that one’s financial resources last throughout the entire retirement. Opting for a higher SWR may enable a lavish lifestyle, but it also entails a greater risk of running out of money. Conversely, a lower SWR may provide more financial security, but it may require a more frugal retirement lifestyle.
One of the most popularly known SWR rules, the William Bengen rule, suggests withdrawing 4 percent of the initial portfolio value after retirement, with subsequent adjustments for inflation. This approach has historically proven reliable for 30-year retirements.
For instance, let’s consider an example where you have $800,000 saved and plan to withdraw $35,000 per year:
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