Two weeks ago, I suggested a way to make withdrawals from your asset base to cover living expenses. A few people emailed me asking about the 4% withdrawal rule. Basically, the 4% rule suggests that 4% of your assets are withdrawn every year to cover your living costs. The 4% is not a rigid amount, and different financial planners use it differently. I do not care to discuss that rule, but I want to reaffirm the explanations in my earlier blog.

I do not believe a predetermined withdrawal formula should be used. My suggestions are to take withdrawals of cash flow income and then principal if needed. Predetermined formulas are subject to too many variables to remain valid over a reasonable period. The formulas can also set in motion an automatic withdrawal process that might not be sustainable over long periods or periods of great upheaval. Some of the variables are interest rates, dividends, stock market appreciation or drops, your asset allocation, cash reserves, inflation, the overall economy, tax rates, and sources of the withdrawal, such as from cash or short-term funds or appreciated stocks held in individual name or from an IRA account subjecting the full withdrawal to taxation, consumer confidence and many other factors.

Another factor is the mechanics of a predetermined withdrawal percentage. Some recommend it be increased annually by an inflation rate. Further, the withdrawals are defined by past experiences and not current or projected situations. I also tend to feel that “formulas” provide many people with a comfort level that makes them feel they do not need to monitor their situation too closely, which is always a mistake.

There is a big-picture situation here: providing for your financial security for the rest of your life. That is a serious undertaking and needs to be at the forefront of your thoughts. You must also be alert to changes that might move or push you off course. To use the last 7 or 8 years by way of illustration, we have seen record low interest rates accompanied by record highs in the broad stock market followed by a pandemic that shut down much of the country for a few months that was followed by huge inflation and bump ups in interest rates and decreases in stock prices. Each of these, and I mean each of these, has a profound effect on withdrawals.

I believe the suggestions in the earlier blog are the way to consider planning your cash flow and asset withdrawals.

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