Decumulation and the Safe Withdrawal Rate, SWR, in Retirement
The Safe Withdrawal Rate, SWR
What I have noticed over the past decade is a common client question: “What is the Safe Withdrawal Rate” i.e. how much 
money can I safely withdraw from my portfolio during retirement such that I don’t run out of money in my lifetime? This article focuses on decumulation of your retirement assets meaning the drawing down and spending of assets while also addressing the “Safe Withdrawal Rate”, SWR. Decumulation is a relatively new term but basically it’s the opposite of the accumulation or the saving process that many are familiar with as they build up retirement assets.
Guaranteed versus Variable Income Sources
It’s often difficult for pre-retirees to understand the cash flow they think they’ll need in retirement, so it’s important to break down sources of income into (i) guaranteed income and (ii) variable income sources.
- Examples of guaranteed income sources are Canada Pension Plan (CPP), Old Age Security (OAS) and company pension plans or annuities.
- Examples of variable income sources would be a Registered Retirement Savings Plan (RRSP) once you decide to convert to a Registered Retirement Income Fund (RRIF) and begin periodic withdrawals. The important distinction is that this income source is variable in that not only are there annual minimum withdrawal requirements but if you are invested in a portfolio of securities. The portfolio will also fluctuate depending upon how the markets perform (your investment return) and how you have invested the portfolio (aka your asset allocation). Please note that a RRIF becomes a guaranteed income source, if you choose to convert it to an annuity (more about annuities can be found by clicking here).
Where To Start
Using the Otar Retirement Calculator, all guaranteed and variable income sources, your age, your anticipated mortality as well as many other factors, the Sustainable Withdrawal Rate (SWR) is determined. Again, the SWR is the recommended maximum annual amount of money that you can safely withdraw from, for example your RRIFs plus CPP, OAS and any other income sources that will last your lifetime with a certain probability. I say a certain probability because returns for variable income sources are not guaranteed as they are invested in the stock and bond markets which vary both up and down. However, using the software, we use a substantial probability to give a reasonable factor of safety.
Fewer Company Pension Plans Now
Over the years, there has been a shift from employees receiving company pensions (know as defined benefit, DB, plans) to defined contribution (DC) plans. These plans shift the risk from the employer to the employee as the company allocates money to your plan but you managed manage the risk (or with the assistance of an adviser). If you look at your guaranteed income sources such as CPP and OAS, does this combined amount represent a sufficient cash flow that you feel comfortable should a downturn in the markets happen i.e. your DB plan goes down significantly? There is no ratio that I know of in my industry but it’s the ratio of guaranteed income to variable income but I feel that is different for everyone? How would you address this uncertainty? Hold higher levels of cash or consider a portion in an annuity at retirement. These are the types of discussions and guidance I work with clients to determine.
Things to Ponder
Think about what the minimum income you might want in retirement? If you aren’t certain about a specific dollar amount, perhaps you can relate to a percentage of your current annual income. This percentage of income is often referred to as a “replacement rate”. I have heard statements like you need a 70% replacement rate in retirement meaning if you make $100,000 per year year pre-retirement, 70% would be $70,000 annually. There is no hard and fast rule, everyone needs to go through the exercise of what makes sense for you!
Going forward
Not sure where to start with your financial plan? Enter your name and email in the box on the right to complete the Goal Planning Checklist. Instantly identify the strengths and weaknesses in your current financial plan.
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