5/31/2015 – A Better Way to Tap Your Retirement Savings (The Wall Street Journal)

Dynamic withdrawal strategies have attracted attention as financial advisers have sought to refine and move beyond the so-called 4% rule. Widely used since now-retired financial planner Bill Bengen published groundbreaking research on safe withdrawal rates in 1994, the 4% rule calls for retirees to spend no more than 4% from their portfolios in the first year of retirement—and then adjust that amount annually to keep up with inflation.

For someone with a $1 million portfolio, the formula produces an initial income of $40,000 and—assuming inflation of 2.5%—an increase to $41,000 in year two.In contrast with that relatively rigid approach, a dynamic strategy takes into account how financial markets—and, as a consequence, retirees’ nest eggs—perform from year to year. Annual withdrawals may be adjusted accordingly. Those adjustments, according to financial advisers, give dynamic withdrawal strategies two advantages over the 4% rule. First they allow for a larger withdrawal rate at the start of retirement, when people generally are most active, says Michael Finke, a professor of personal financial planning at Texas Tech University.

Read the full article at The Wall Street Journal.