Reducing Withdrawal Rate from Retirement Savings

Due to the decline of our investments in 2008, our calculated withdrawal rate from savings has increased from 2.6% to 3.6%. While most financial advisors consider a 4% or less withdrawal rate to be acceptable, I feel we need a bigger margin of safety that just 0.4%. If the our retirement savings should fall another 10% in 2009, we'll be over a 4% withdrawal rate, which I feel would be risky since we may outlive our savings.

As I see it, there are three ways to reduce our withdrawal rate: 1) Deliver investment returns greater than 4%; 2) Generate income outside of investments; and 3) Reduce expenses. To me, I can't guarantee that #1 will happen, but I have a much better chance of controlling and delivering #2 and #3. Here are the specific actions I plan to take in each area:

Generate income. I calculate that I would need to generate pre-tax earnings equal to 20% of our expenses to reduce our withdrawal rate to below 3%. I believe it is possible to earn sufficient through part time jobs. In 2008, I was able to earn 6% of our expenses with two part time jobs.

By increasing income from the current part time jobs and adding a third one, I think I can guarantee earning at least 7% of our expenses, with 10% being probable.

Reduce expenses. I would divide our 2008 expenses into three major categories: living expenses (42%), taxes (22%) and mortgage (19%). I calculate that we would need to reduce expenses by 17% (post tax) to take our withdrawal rate below 3%.

Even though we are already frugal, I believe we can lower living expense by 3% through eliminating waste and using job perks to eliminate some entertainment costs (subject of future post). Since most of our 2008 federal and state income taxes were due to Roth IRA conversions, we could eliminate about 10%, by foregoing doing Roth conversions in 2009. Finally, if we can refinance from our current 5.375% mortgage to a 4.75% mortgage, we would reduce mortgage expenses by 7%.

Out of the 20% possible reduction, I expect we can guarantee a 7% reduction, with a 10% reduction being highly likely.

Overall, I think we have a good chance to reduce our withdrawal rate to account for the poor investment returns of 2008. Of course, these calculations assume investment returns of 4% for 2009 which is not a guarantee in this volatile market. If the market continues to decline, I will need to seriously consider generating more income via options such as a full time job.

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This is not financial or retirement advice. Please consult a professional advisor.

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