In retirement, your, "measure for success" as an investor changes from beating the market to insuring your income for life. Indeed, when pre-retirees, or retirees think about risk, many say outliving their money is their number one fear. Choosing a withdrawal rate that is sustainable over the course of your retirement will plan an essential role in your retirement income plan.
What is a Sustainable Withdrawal Rate?
When planning your retirement income, calculating a withdrawal rate is just the start. Understanding the impact of that withdrawal rate on your long-term financial security is essential. You want to base your planning on a sustainable rate.
Simply put, you want to choose an amount you can withdraw annually from your portfolio and still be reasonably certain you will not run out of money during your lifetime.
Many studies have been done over time to determine what initial withdrawal rate is sustainable. These studies consider three important variables that affect the probability of your assets lasting you through retirement.
- Retirement Planning Horizon — years in retirement
- Portfolio mix
- Initial withdrawal rate
Do you have a retirement income plan?
Retirement Income Planning is more than just doing a retirement plan. Retirement plans are done using projections based on averages. Average returns, average inflation, average expenses, average tax rates and average life-expectancy. However, we know that no one will live an average retirement.
Retirement Income Planning is a process to help you create a paycheck in retirement that anticipates deviations from the "averages", helps build assurances for income and expects adjustments will be made along the way.
Right now you may be imagining the ways your life will change after you retire. To succeed financially during retirement, however, it is important to understand that your mindset will also need to change. Because the strategies and solutions that help build wealth are fundamentally different from the strategies and solutions that help create income from it. So you will need to adjust from a way of thinking developed over the course of several decades to a new way of thinking that will need to last for the rest of your life.
How to approach your new priorities?
Quite simply, when you retire your focus shifts from growing your assets in the most effective way possible, to distributing your assets in the most efficient way possible. Because you do not want to run out of money, lose your independence or become a burden on others. With that shift in focus, your financial priorities may include an even greater emphasis on finding prudent strategies for carefully preserving, spending and sharing the wealth you accumulated over a lifetime of hard work and diligent investing.
The good news is, we can help!
At RBC Wealth management, we are focused on your financial well being and have access to a broad range of tools, experts, and wealth management resources to help make your retirement income planning manageable.