There are different systems of withdrawals. An article by Cristine Benz and John Rekentkaler at MorningStar discusses how safe is the model of financial planner Bill Bengen, which had a 4% starting rate with annual inflation adjustments to the initial cash amount. After 30 years, Bengen’s started to be considered too modest, the article stated.

The low starting bond yields and equity valuations are high in relation to market history can bring changes to that model. If future estimates for investment performance and inflation are used, MorningStar would lower the standard to 3.3% from 4% originally. This comes from a fixed real withdrawals for a 30-year period, and 90% odds of success.

Rethinking is key in a time in a time that macroeconomic conditions are changing. The higher starting and life time withdrawals comes to adjusting to the current market valuables – lower success rate and refraining inflation adjustments.

By comparison, retirees that use withdrawal systems based on portfolio performance, profiting less when market is negative and more when it is up, can increase their initial and lifetime withdrawals. The MorningStar research found that the flexible withdrawal system would support a nearly 5% starting withdrawal rate. That is in exchange of more volatility.

One thing we can learn from withdrawal rates in history is that the calculated withdrawal rate that succeeds for 90% of trials in the last 50 years, an imaginary investor could potentially make 30 years of withdrawals without being cashless.

Another point if you are thinking about making more money is cash flow. One chart shows how much starting safe withdrawal rates would vary depending on the time (see chart in original article). In a nutshell, the reduced bond yields, strong equity returns, and low inflation were the key factors playing in the last 40 years and that has sustained the higher withdrawals.

Therefore, going forward the safe withdrawal rate, the three factors mentioned previously should be taken into consideration. Even though inflation is rising, the rate is low over the past several years.

Using the 30-year asset-class return MorningStar estimates, the return ranges from 6% to 11%, according to the subasset class; fixed-income would be between 2% and 3.5%; and inflation at 2.1%. The conclusion is that a 3.3% start is a safe withdrawal rate for balanced portfolios.

An argument in favor of 3% starting is that most balancer of savers are much higher than 10 years ago. The retirees who are willing to tolerate 85% success rate could take 3.7% of a balanced portfolio at the start, while the ones that want an 80% rate could take out 3.9%.

Again, the initial withdrawal rate will depend on the needs, the research, and the trade-offs the retiree is willing to take.

Adapted from MorningStar