Bump Your Safe Withdrawal Rate

Are you near retirement? Are you realizing you want or need to bump your safe withdrawal rate?

In other words, rather than going with the standard 4% figure people use, do you need to look for ways to nudge that value up?

Maybe to 4.25% or 4.5%. Maybe even higher. Like 5%.

You need to be really careful when doing this sort of math. But here’s the thing: You can use some tricks to bump your safe withdrawal rates.

The list that follows identifies the good ideas I’ve collected from people. But note that you can’t use all of these. You’ll use one or two or maybe three. And what you’ll get is maybe a half a percent to one percent bump. At best.

But let’s go through the list.

Bump Your Safe Withdrawal Rate with Higher Return

Okay, a first easy-to-describe but not so easy-to-implement idea: You should be able to bump up your safe withdrawal rate if you can bump up your portfolio return.

A portfolio heavier with equities and a portfolio that uses modern portfolio theory construction techniques may let you get a better return—maybe even without bearing additional risk. And that’ll help your safe withdrawal rate.

A corollary to this: If your portfolio earns a low return—perhaps because you don’t have enough equities or perhaps because you did a bad job constructing the portfolio—you probably decrease your safe withdrawal rate.

I’m going to refer you to the PortfolioCharts.com website’s longer discussion of how this works because the subject is trickier than you might at first guess: How Safe Withdrawal Rates Work.

Bump Your Safe Withdrawal Rate by Lowering Risk

Another way to bump your safe withdrawal rate?

Okay, this is a little theoretical, but if you can dampen the risk of your portfolio (such as by adding riskless assets or by building your portfolio with less correlated asset classes) you should be able to safely nudge up your safe withdrawal a bit. And this is true even if the portfolio doesn’t earn a higher return.

Note: The article I linked to in the preceding discussion also talks about how dampening risks improves withdrawal rates.

Bump Your Safe Withdrawal Rate with Variable Withdrawals

Another hack: The math says you can bump your withdrawal if you’re willing to dial down your withdrawal during a bad patch of portfolio returns.

For example, though the rule of thumb says you can draw 4% pretty safely, you might be able to draw 4.5% pretty safely as long as you cut your draw down to 4% or 3.5% in a bad economy and for as long as your portfolio is beat up.

The cFIREsim tool lets you model how varying your draws impacts your retirement savings and how it dials down the chance you’ll run out of money.

Bump Safe Withdrawal Rate By Shortening Retirement

If you shorten the number of years you draw down retirement savings, you probably bump the safe withdrawal rate significantly.

Working five years longer—even if you don’t save any more money and even if your portfolio doesn’t do anything other than keep up with inflation—should let you bump a 4% withdrawal rate to 4.5%. Roughly.

Note: Both the FIREcalc and cFIREsim calculators let you easily model a delay in your retirement age.

Bump Your Rate with Do-it-yourself Investing

The cost of running your portfolio directly impacts your safe withdrawal rate.

For this reason, learning to build your own portfolio using inexpensive index funds (from someone like Vanguard) and paying a .1% or .05% annual fee rather than paying a 1% or .5% fee should dramatically boost your safe withdrawal rate.

And then this related comment: If you’re paying high fees for investment advice right now, you really are on a path to future lower safe withdrawal rates given the high fees. Sorry. But you want to know that. You may be looking at 3% or 3.5% rather than 4% or better.

Bump Safe Withdrawal Rate with Higher Failure Rate

Really, the safe withdrawal rate discussion boils down to a withdrawal rate that historically would have failed only a small percentage of the time.

For example, your safe withdrawal rate might only fail in 5% or 10% of historical cases if you draw at the rate until you reach age 90.

Here’s the thing to consider though. That portfolio failure rate isn’t actually your true failure rate given fact that there’s a good chance you won’t make it to age (say) 90. (Me either, just for the record.)

A 65-year-old male has a 6% chance of making it to age 90, for example.

If you’re a 65-year-old with a portfolio that fails 5% of the time, that means there’s really only a 6% chance to experience the 5%-of-the-time failure.

With a 5% failure rate and a 6% probability you’ll be alive, the compound probability of both conditions equals .3%.

That’s less than a one in three hundred chance. And I think too low to be worrying about for many people.

This sort of logic suggests you might in this situation accept the larger failure rate of a larger safe withdrawal rate.

Combining a 10% failure rate with a 6% probability you or I will be alive, for example, means a roughly .6% failure rate, so a 1 in 170 chance of having your money run out before you do.

No magic here, obviously. You or I are bearing more risk. But that said, we both want to make sure we’re not using a safe withdrawal rate that goes overboard trying to dial down risks.

Tip: Vanguard provides a useful and simple longevity calculator you can use here: Vanguard Longevity Calculator.

Bump Safe Withdrawal Rate with Bernicke Spending Model

Here’s one other approach for bumping up your safe withdrawal rate, at least during the first years (or decade) of your retirement.

You may decide to apply the research done by Ty Bernicke and discussed in his whitepaper Reality Retirement Planning: A New Paradigm for an Old Science.

Bernicke has documented that we spend less as we age. And if that’s true, you may be able to plan for a larger withdrawal in your early years if you’re okay with budgeting for a smaller withdrawal rate in your later years.

Maybe you go 5% in your early years (or least you do as long as the capital markets don’t swoon). But then you plan and commit to dialing down spending to 3% or whatever in your later years. Perhaps by downsizing a home, dumping the second car, and staying a little closer to home when you travel.

Final Thoughts

Just so there’s no misunderstanding: The seven hacks for bumping your safe withdrawal rate don’t let you get crazy.

I don’t think there’s a way to bump your safe withdrawal to 6% or 7%. (I only wish.)

But some common-sensed collection of the techniques described above may allow you to bump your percentage by half a percent to a percentage. Especially if you’re clever about combining some of the ideas listed above or if you have been doing things pretty inefficiently right now.