5%? 4%? Less? What’s a safe withdrawal rate during retirement?

Historically, the unwritten rule in the investment industry has been that, to maintain your capital level over 30 years of retirement, you shouldn’t withdraw more than 4 to 5% from your portfolio in any given year.

The figure was established in 1994 by financial planner William Bengen, who wanted a safe and simple-to-manage rate of withdrawal for his retiring or retired clients. One that gave them confidence that they wouldn’t outlive what they’d saved — and that made it likely there would still be something left to pass along to the next generation.

In recent years, however, the rule has been viewed by many — including me — as a tad too high. My take is that the days of high guaranteed interest rate returns from GICs are gone, bond yields are low and investment volatility is up, all of which can reduce the growth potential of your portfolio. Retiring clients also often don’t give enough consideration to the likelihood of high health and retirement home costs once they reach their 80s and 90s.

That’s why, in view of a realistic annual return of 3 to 4%, net of fees, in a balanced portfolio (30-60% equities), a withdrawal rate of 3 to 4% — instead of 4 to 5% — is more prudent.

Be flexible from year to year

That said, it’s important to remember that returns fluctuate and so will your financial needs from month to month and year to year — maybe (post-COVID!) you’d like to take a trip around the world for your 50th anniversary or one of your children or grandchildren needs financial assistance to get a degree or buy a home. There’s also the matter of government pensions: if you’re postponing your CPP and OAS until you reach 70, but you’re retiring at 65, you may need more than 3 or 4% of your nest egg to live off of for the first few years but once you start receiving those pensions, your portfolio withdrawal amounts can drop.

And, if you’re not planning on retiring until much later, like 75, you likely won’t need your money to last 30 years so your withdrawal rate can be higher when you start.

The key, as it often is, is for you and your advisor to develop a good financial plan and to be flexible. In years when your investment returns are extremely high, you may be able to withdraw a little more than 3 or 4% or you might choose to build up your portfolio even more, and when returns are low or even negative, you may need to draw down less.

The reality is, even with an average withdrawal rate as high as 5%, there’s a very good chance you’ll still end up with a larger nest egg in 30 years than you started with but you never know — and neither do I — and for that reason, it’s always best to play it safe.