The RetireMentors

Retirement advice from experts in the business

March 9, 2016, 10:11 a.m. EST

The ultimate retirement-distribution strategy is here

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By Paul A. Merriman

About Paul

Paul Merriman is committed to educating people of all ages to get the most from their retirement investments. Founder of Merriman Wealth Management, a Seattle-based investment advisory firm, he is the author of numerous books on investing: "Financial Fitness Forever," "Live It Up Without Outliving Your Money," and the new "How To Invest" series, free at his website:  "How To Invest" series: "First Time Investor," "Get Smart or Get Screwed: How to Select the Best and Get the Most from Your Financial Advisor" and "101 Investment Decisions Guaranteed to Change Your Financial Future." In his retirement, Paul writes a weekly column at MarketWatch and continues his weekly podcast, Sound Investing, which was recognized by Money magazine as "the best Money Podcast in 2008". He is president of The Merriman Financial Education Foundation and all profits from the sale of his books are used to advance financial literacy. His recommendations for portfolios of Vanguard funds, Fidelity funds and ETFs, podcasts, articles and books are available at paulmerriman.com. Follow Paul on Twitter @SavvyInvestorPM.

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After that, your withdrawals would have risen handsomely: $114,792 in 1980; $169,042 in 1985; and $315,780 in 1990.

How it gets better

For the retiree with ample savings, things get even better. That's because this person most likely could afford to take out 6% instead of 5%. You can see the results of this in Table 8 . Table 8 shows that the lowest distribution, in 1975, of the 60% equity allocation was $49,466, just barely below this retiree's assumed cost of living of $50,000 five years earlier.

But for a retiree who started with $1.5 million and took out 6%, we can multiply all the distributions in Table 8 by 1.5. That brings the 1975 distribution to $74,199, well above this retiree's $50,000 basic needs even after adjusting for inflation.

The next dozen years were even kinder to the retiree who could afford to take out 1.5 times the figures in Table 8: $123,918 in 1980; $173,077 in 1985; and $306,655 in 1990.

If you carefully compare the 60% equity column in Table 7 (5% withdrawals) and Table 8 (6% withdrawals), 1you may notice something interesting in the withdrawal amounts in the year 1990.

At a rate of 5%, our retiree gets to spend $210,478 in 1990; at a 6% withdrawal rate, the comparable amount is only $204,396. Can that be right?

Less is more

In fact, it is quite correct, an example of how "less" can eventually become "more."

Here's why: This relatively small difference results from the cumulative effect of the higher withdrawal rate. Taking out more (6% in this case instead of 5%) ultimately leaves you with less. If we follow the numbers in the tables out another 10 years, to the year 2000, the 6% table gives our retiree $246,217; in the 5% table, he gets to spend $281,844.

Is this a bad deal for the retiree taking money out at 6%? I don't think so, and I'll tell you why.

Because of inflation, a retiree would have needed $224,026 in the year 2000 in order to replace $50,000 of spending in 1970 dollars. Each of the withdrawal figures I just cited would cover that need.

More to my point here, the person who had started retirement with $1.5 million could multiply either of those figures by 1.5, providing a very ample cushion above his inflation-adjusted basic needs.

In addition, the higher withdrawal rate that was made possible because of ample savings provided significantly higher withdrawals for the first 10 years of retirement. Those are the very years when many retirees are most likely to want to travel and follow other potentially expensive pursuits.

What if you’re frugal?

I have known many retirees who are very conservative and who don't want to take out even 5% of their money if it's not essential.

Table 5 and Table 6 , respectively, show the result of taking out only 3% and 4%.

In both of these tables, you see the first decade provided fairly low distributions. But after 20 years, the distributions become significantly larger than the corresponding ones from the 5% withdrawal schedule. Here, "less" eventually becomes "more."

At the bottom of the tables, the values at the end of 2015 are also significantly greater when withdrawals are 3% or 4%.

There are some important trade-offs, of course. It's great to have big payouts in your later retirement years and lots of assets to leave in your will. But in real life, most retirees want to spend more money in the early years of retirement when their health is likely to be better.

More than anything else, I think this analysis emphasizes the value of saving more than you think you will need. And it underscores the value of thinking carefully ahead of time about your priorities as you plan for retirement.

If you can retire with more than enough money to meet your basic needs — enough to follow this flexible plan – then you will be in great financial shape. It's worth a bit of extra savings when you're working. It's worth working a little longer if you can. And it's worth keeping your cost of living under control.

You now have the recipe for what I think of as the ultimate retirement luxury.

For a more detailed discussion of how to use these tables to find the right withdrawal strategy for you, check out my podcast, "The ultimate retirement distribution strategy".

Richard Buck contributed to this article.

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