Question

What are the weaknesses of the withdrawal rate method?

Answer 1

And; * The safe withdrawal rate (SWR) method calculates how much a retiree can draw annually from their accumulated assets without running out of money prior to death.

* The SWR method employs conservative assumptions, including spending needs, the rate of inflation, and how much annual return investments will return.

* One problem with SWR is that it projects economic and financial conditions at retirement to continue as-is into the future, when in fact they can change in the years or decades after retirements.

Limitations of the Safe Withdrawal Rate Method

1 A shortcoming of the safe withdrawal rate method is that depending on when you retire, the economic conditions can be very different from what initial retirement models assume. A 4% withdrawal rate may be safe for one retiree yet cause another to run out of money prematurely, depending on factors such as asset allocation and investment returns during retirement.

2 In addition, retirees don’t want to be overly conservative in choosing a safe withdrawal rate because that will mean living on less than necessary during retirement when it would have been possible to enjoy a higher standard of living.