We all are pretty familiar with the 4% rule which provides a mechanism to adjust one's SWR or "safe withdrawal rate" based on one portfolio value. In a year like this, any percentage withdrawal feels anything but "safe".
For example, if one started the year with a portfolio value of$1M and took a 4% withdrawal for the up coming year, one would have pulled ($1,000,000* .04) or $40,000. If after that withdrawal one's portfolio fell 20%. That $1M portfolio minus $40,000 (withdrawal) minus a 20% market correction, is now $768,000.
This math frightens retirees. It's human nature to see this 24.2% portfolio drop as a permanent loss. This can trigger some of us to "sell low" and other poor timing strategies.
For me, years before pulling from my retirement portfolio, I tried to determine what my yearly withdrawal needs were going to be and decided to separate those 3-5 year needs into lower volatility assets. In a sense, try to insulated these near term withdrawals from near term volatility. I would give up some upside to protect against the downside. So instead of selling equities into down markets, I positioned 3-5 years of withdrawals in assets that were less exposed to equity assets volatility. For me, these lower volatility assets are CASH, ST Bonds (VFSTX), and conservative allocation funds (such as VWINX).
I position 20% of my retirement portfolio in low volatility assets. Collectively the losses in these assets YTD has been close to (-6.5%). with this in mind, I have reduced my 4% SWR by 7%. So instead of my normal 4% SWR of $20,0000, I limit myself to 7% less or $18,600. I am hoping it is a helpful adjustment that my budget can handle.
Any criticisms, comments or strategies welcome.
I like your withdrawal % reduction idea to compensate for loss in the bucket.
They think 4 to 5 years cash is enough, but if you go back to 1929 you can see years where the market took 7 to 8 years to recover.
I would keep at least 6 or 8 years of minimal expenses in cash or short term bonds
The worst thing that can happen in retirement is to go into it in the middle of a bear market
Time to hit the gym, Derf