Undoubtedly, our clients are free to do what they choose with their invested funds. However, it is not uncommon for them to seek my advice when it comes to withdrawals – especially those that are above and beyond their planned/recurring distributions.

Taking funds out of savings runs contrary to what our actions have been most of our lives – save, save, and save some more! When it comes time to pull money out of invested portfolios, it can be intimidating to determine how much to take (and when to take it). No one wants to hurt their future plans or undo the years of hard work put into building up their savings.

There is a common rule when it comes to withdrawals, known as the “4% rule.” This rule was credited to financial planner William Bengen. Developed in the 1990s, the rule states that you can withdraw 4% (or less of course) from a balanced portfolio (one comprised of stock and bonds in his example), each year adjusted for inflation, and your portfolio will last at least 30 years. As an example, if you’ve saved $1 million, in year one you could withdraw $40,000. In year two, if inflation was 2%, you could withdraw $40,800.

Like most highly-quoted mantras and rules, there are some limits with this approach (it is rather rigid, assumes a certain portfolio mix, based on historical data, uses only a 30 year horizon, ignores taxes and fees – to name a few).

As a result, I use a few other methods of analysis when helping clients evaluate a withdrawal – especially when it is additive to their recurring or planned withdrawals.

Go back to your goals & long-term plan

I know, I sound like a broken record! But truly, very few things in wealth & financial management can be done in isolation. You can’t assess a withdrawal without knowing what your long-term financial plans are (and what assumptions are inherent within any plan you have in place). Go back to your plan and look at what portfolio value you need to generate sufficient income to meet your needs. Look at what withdrawal rate was used in that plan. Compare your actual results versus the anticipated growth in the plan. Sometimes a quick look at your plan is all you need to affirm a withdrawal.

Withdrawal versus earnings

Much like when you’re working and building up savings, it’s helpful to look at what you’re earning on versus what you’re spending. Same goes for material withdrawals from an established portfolio. (Note: for this example, I’m assuming a non-retirement account with no tax impact of withdrawals (ie: no resulting capital gains)).

It’s a relatively easy comparison to look at the planned withdrawals versus the income generated by the portfolio. If the income (ie: interest and dividends) exceeds the planned withdrawal, the long-term earnings power of the account likely won’t be impacted by the withdrawal (as the principal on which that income is earned remains in tact post withdrawal).

Aggregate portfolio value

In the item above, the focus was on income (dividends and interest paid on the investments). However, it’s just as important to consider appreciation (or depreciation) of your portfolio when taking withdrawals. Not only will this dictate the capital gains impact in a taxable account, but it also determines whether the timing of the distribution will have long lasting impacts.

For instance, in 2021, many found their accounts up 10-20% in the year and nearing all time highs. For some, this may have taken their account value well above their “baseline” (ie: amount needed to generate ongoing required income and/or return levels to meet goals (see #1 above)). In that case, a withdrawal may have been taken without impacting the earnings power of the portfolio moving forward.

Contrast that to March 2020 right after COVID came on the scene. Many portfolios had fallen considerably. At that time, a withdrawal may have pulled portfolios below the longer-term required level, resulting in negative long-lasting impacts to wealth accumulation.

Qualitative vs. Quantitative

It’s impossible to remove emotion from financial decisions. For most of us reading this, we are privileged that our basic needs have been met. As a result, most “added” withdrawals are for wants (versus needs). And wants are inherently very emotional. It’s always helpful to talk thru the real motivations behind a withdrawal and examine if the short-term qualitative reasons justify the potential long-term quantitative impacts.

Withdrawals, like many other financial items and transactions, require careful and diligent review and consideration. The above items are high-level guidelines to consider but as always, your situation it unique to you and should be discussed with your trusted advisors.

Note: All commentary above is as of the date of this post and is for education and informational purposes only. Windermere and its principals do not intend for this to serve as investment advice and are not responsible for any actions taken based on this article. Consult your tax and/or financial advisor before taking any actions as it relates to your own investment portfolio