Question

Describe sustainable withdrawal plan and two of its advantages. Also, use the scenario when the retirement wealth is $1 million and determine the FIRST and SECOND year spending after retirement, assuming inflation rate is 2%. TTT Arial 3(12pt) T-- E-5.

Answer 1

Appropriate withdrawal plan for retirement plans are essential for ensuring optimum utilization of available funds without the fear of insufficient funds for essential needs. Different plans are generally available like:

1. 4% Rule: The 4% rule is a method in which which one withdraws 4% of retirement corpus in the 1st year of retirement and in the subsequent years, an additional 2% in the subsequent years to account for inflation. This withdrawal strategy is quite popular due to its simplicity to understand and certainly in cash flows.However, this approach is far too simplistic and does not consider the impact of interest rate movement, actual inflation in market and market volatility.

2. Fixed dollar withdrawals: as name implies, a fixed amount is withdrawn periodically. Too simple and predictable cash flows. Predictable cash flows helps in budget accordingly. But it doesn’t provide any protection against inflation or changes in market environment.  

3. Fixed percentage withdrawals: a variant of the above method with only difference being a percentage of principal rate than an amount. Pros and cons same as above.

4. Systematic withdrawal plan: : Here we can only withdraw the income from the portfolio created by the retirement corpus such as dividends or interest. As the principal amount is not withdrawn, the principal erosion is prevented reducing the chances of running out of money. There is also the potential to grow your investments with proper investment planning and proper along with providing retirement income.
But the income amount is quite erratic and market dependent. Inflation protection is still not available for retirement withdrawal.

Systematic withdrawal plans when combined with fixed percentage or fixed amount without would be an ideal withdrawal plans as it will provide a minimum fixed income (from fixed amount/percentage withdrawal) and growth potential (from systematic plan).