Dynamic Updating

DEFINITION of 'Dynamic Updating'

A method of determining how much to withdraw from retirement savings each year. Dynamic updating is different from other methods of calculating retirement account withdrawals, such as the safe withdrawal rate method, in that it reevaluates how much you can withdraw each year based on changes in inflation, life expectancy and portfolio values. It also accounts for any income you receive during retirement.

BREAKING DOWN 'Dynamic Updating'

Dynamic updating tries to ensure that a retiree does not run out of money before the end of his or her life. The most important considerations in dynamic updating are the retiree’s expected lifespan and how that expectation changes annually, and the possibility of failure rate which is the likelihood of running out of money given a particular withdrawal percentage.

Dynamic updating means that you don’t simply choose a withdrawal rate, such as 3.5%, when you first start taking distributions from your retirement account, then stick to that rate year after year no matter what. Instead, you look at what’s happening with all the variables that influence how much you need to retire and how long your nest egg is projected to last.

Maybe you were critically ill last year but have made a full recovery. Maybe you’ve taken on a part-time job. Maybe a long bull market suddenly ended and the economy has entered a recession. You might want to withdraw more or less than 3.5% this year depending on how circumstances have changed and how those changes affect your projections for the future. You don’t bury your head in the sand and keep withdrawing 3.5% if the market has crashed.

Similarly, with dynamic updating, you would not continue with such a conservative withdrawal rate if you learned you had six months to a year left to live. Increasing your withdrawal rate means a higher possibility of failure if you outlive that bleak prognosis, but dynamic updating means increasing your quality of life while you can still enjoy it.

In summary, dynamic updating means reevaluating where you are each year and adjusting your retirement account withdrawal rate accordingly.