Withdrawalplan

During working years, people add money to savings. In retirement, or when a fund is meant to pay an income, the flow reverses and money is taken out.

A withdrawal plan is the set of rules that governs that outflow, such as a fixed dollar amount each month, a fixed percentage of the balance each year or a mix of the two. The key figure is the withdrawal rate, which is the amount taken in a year divided by the value of the portfolio.

A low rate is more likely to be sustainable over a long retirement, while a high rate drains the pot faster. Many planners discuss starting rates in the region of 3% to 5%, but there is no single safe number because it depends on returns, inflation and how long the money must last.

Sequence of returns risk is a major concern. If markets fall early in retirement while withdrawals continue, the portfolio is smaller when the recovery arrives, and it may never fully catch up.

The same average return can produce very different outcomes depending on the order in which good and bad years arrive. Planners handle this in several ways.

They may hold a cash reserve for two or three years of spending, adjust withdrawals downwards after poor years or draw first from the accounts that are best for tax. A plan should also allow for inflation, which raises the cost of living each year and means that a fixed dollar amount buys less over time.

Withdrawal plans are not just for individuals. Charities, endowments and trusts use similar rules, such as a spending policy of a set percentage of the average fund value over several years.

Tax rules and legal limits differ by country and by account type, so the plan should be reviewed with a qualified adviser. A good plan also answers a few simple questions in writing.

These cover how much is needed each month after tax, which accounts will be drawn first, what will trigger a cut in spending and who will take over the decisions if the owner cannot. Writing the answers down makes the plan easier to follow when markets are stressful.