If you’re increasing your recommended safe withdrawal rate for retirement now, you’re likely making a mistake. You might be inadvertently top-ticking the market as the Fed embarks on what is likely a multi-year rate cut cycle.
One of the main reasons the Fed is cutting rates is due to growing weakness in the labor market. Inflation has also slowed down, prompting the need to make rates less restrictive to prevent a recession. So, by raising your recommended safe withdrawal rate, you’re actually putting yourself and retirees at greater financial risk. Strangely enough, some retirement researchers are advocating for this exact strategy as we’ll see below.
Let’s break down why this is happening and why I still stand by my dynamic safe withdrawal rate approach. For context, I left my 13-year career in finance in 2012 and haven’t had a day job since. My wife retired in 2015, and she hasn’t returned to work either.
A Dynamic Safe Withdrawal Rate Is The Way To Go
I’m a strong advocate for adopting a dynamic safe withdrawal rate in retirement. Relying on the outdated 4% rule from the 1990s doesn’t make sense in today’s rapidly evolving world. Just like we no longer use corded dial-up phones, why would we stick with a safe withdrawal rate recommendation from 40 years ago?
In 2020, as the pandemic unfolded, I urged people to rethink their approach to safe withdrawal rates. Instead of adhering to a fixed rate like the 4% rule, I introduced the concept of a dynamic safe withdrawal rate, which adjusts to 80% of the 10-year Treasury bond yield.
When the 10-year yield dropped to 0.62% during the flight to safety, this meant reducing the safe withdrawal rate to about 0.5%. Some people were outraged, claiming a 0.5% withdrawal rate was unreasonable. “That would require saving