DEFINITION of 'Safe Withdrawal Rate (SWR) Method'

The safe withdrawal rate (SWR) method is one that retirees use to determine how much they can withdraw from their accounts each year without running out of money before reaching the end of their lives. The safe withdrawal rate method is a conservative approach that tries to balance having enough money to live comfortably with not depleting retirement savings prematurely. It is based largely on the portfolio’s value at the beginning of retirement.

BREAKING DOWN 'Safe Withdrawal Rate (SWR) Method'

Figuring out how to use your retirement savings isn’t easy because there are so many unknowns, including how the market will perform, how high inflation will be, whether you will develop additional expenses (such as medical), and your life expectancy. The longer you expect to live, the faster you could draw down your savings; in addition, the worse the market performs, the more likely you are to run out of money.

The safe withdrawal rate method tries to prevent these worst-case scenarios from happening by instructing retirees to take out only a small percentage of their portfolio each year, typically 3% to 4%. Financial experts recommended safe withdrawal rates have changed over the years as experience has illustrated what really works and what doesn’t work and why.

Knowing what safe withdrawal rate you’d like to use in retirement also informs how much you need to save during your working years. If you want a SWR of 4%, you need to save more than if you want a SWR of 3%. The rate you choose affects how aggressively you need to save and how long you need to work.

A shortcoming of the SWR method is that depending on when you retire, the economic conditions can be very different from what initial retirement models assume. A 4% withdrawal rate may be safe for one retiree yet cause another to run out of money prematurely, depending on factors such as asset allocation and investment returns during retirement. In addition, retirees don’t want to be overly conservative in choosing a safe withdrawal rate because that will mean living on less than necessary during retirement when it would have been possible to enjoy a higher standard of living. Ideally, though this is rarely possible because of all the unpredictable factors involved, a safe withdrawal rate means having exactly $0 when you die, or if you want to leave an inheritance, having exactly the sum you want to bequeath.

An alternative to the safe withdrawal rate method is dynamic updating, a method that, in addition to considering projected longevity and market performance, factors in the income you might receive after retirement and reevaluates how much you can withdraw each year based on changes in inflation and portfolio values.

RELATED TERMS
  1. Systematic Withdrawal Schedule

    Systematic Withdrawal Schedule is a method of withdrawing funds ...
  2. Withdrawal Penalty

    A withdrawal penalty is a penalty or extra charge incurred by ...
  3. Sequence Risk

    Sequence risk is the notion that investment income is impacted ...
  4. Retirement Planning

    Retirement planning is the process of determining retirement ...
  5. Term Certain Method

    The term certain method refers to a way to calculate minimum ...
  6. Fixed Amortization Method

    The fixed amortization method spreads retirees’ account balances ...
Related Articles
  1. Financial Advisor

    How Much Should Retirees Withdraw From Accounts?

    Figuring out how much to withdraw from a retirement account every year can be a tough task. Here's help for both the saver and the advisor.
  2. Retirement

    What’s the Best Retirement Drawdown Strategy?

    Retiring soon? The challenge now is to figure out how to make your nest egg last for the rest of your life.
  3. Financial Advisor

    The 4% Withdrawal Rule: One Size Fits All?

    The 4% rule for retirement withdrawals has been a staple in financial planning for over 20 years, but no rule of thumb or approach is one size fits all.
  4. Retirement

    How to Evaluate Your Retirement Plan

    Here are four things to consider to make sure you are financially prepared for retirement.
  5. Retirement

    Do This to Avoid Outliving Your Retirement Portfolio

    Many retirees put too much money into safety and don’t allow their portfolio to continue to grow. Here’s how to avoid outliving your assets in retirement.
  6. Financial Advisor

    How to Prep Your Portfolio for Down Markets

    Down markets are a reality that can kneecap your retirement withdrawal plans. Minimize the pain with these strategies.
  7. Retirement

    Why Being Too Conservative Can Hurt Your Retirement Savings

    People close to retirement have to get more conservative in their investments, but they can't be too safe. Unless they want to see their savings lose value.
  8. Retirement

    6 Signs You're Ready to Retire Early

    If you can answer "yes" to these six questions, you may be ready to retire early.
  9. Retirement

    5 Crucial Tips For Your Retirement Income Planning

    Here are strategies to ensure that your assets have staying power, and that your wealth-making years provide enough funds for your income-taking ones.
  10. Retirement

    How Retirees Should Think About Retirement Income

    It’s the savings you have accumulated for retirement that make the difference between just getting by and being able to enjoying life.
Trading Center