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How to Cash In
(Without Cashing
Out)
Ten critical mistakes that retirees make when withdrawing from their portfolios (and how to avoid them)
Finance
There’s a lot of advice regarding how
you should build your portfolio; how to
save money and how to invest it. And
that makes sense. If our goal is a long
and financially secure retirement, we’d
better learn how to build and grow our
nest egg.
But what happens when it’s time to
take money
out
of your portfolio? What
are the rules for making withdrawals
from your retirement fund? How are
you supposed to cash in your nest egg
– that is, without cashing out?
The fact is, if you don’t have a viable
strategy for making withdrawals, it’s
easy to make mistakes. The conse-
quences of those mistakes can be financial disaster:
a significant curtailment of your retirement lifestyle,
being forced to put significant life goals on hold or,
in a worst-case scenario, running out of money in the
middle of your retirement.
Assuming that the “4% rule” is good enough
It used to be that planners and advisors had a simple rule when it came to retirement withdrawals: if you cashed in no more
than four per cent of the value of your retirement portfolio every year, you’d be fine.
Such rules were based on some important research done by well-respected financial planner William Bengen in the 1990s.
After performing a number of historical simulations, Bengen concluded that a 65-year-old could draw down as much as 4.2% of his or her
portfolio every year without danger of outliving his or her money. By contrast, Bengen’s simulations suggested that a withdrawal rate of
5.0% per year would give an individual as much as a 30% chance of outliving his or her money. The conclusion was clear: stick to 4% and
you’re fine.
However, a lot has happened since Bengen published his research in 1994. Today, we are living through a period of exceptionally low in-
terest rates. At the same time, we’re also living through an exceptionally volatile time for equity markets. Back in 1994, we hadn’t yet seen
the dot-com bust, much less the worldwide financial crisis of 2008. In addition, advanced therapies and drug treatments have allowed
retirees to live much longer. This is good news, but there’s no denying that it places an additional burden on their investment portfolios.
Add it all up and it’s not surprising that many financial professionals now believe the 4%“rule” to be only a guideline. Instead of consider-
ing 4% as a rigid withdrawal guideline which you can follow in all market conditions, consider it a starting point, then adjust it for your
individual goals, the size of your portfolio, your tolerance for risk and your life expectancy.
By James Dolan
1
With that in mind, here are 10 critical errors that retirees
make when withdrawing funds from their portfolios –
along with some practical tips regarding how you might
avoid making such errors.