A large number of academic studies have looked into the best ways to make withdrawals from retirement savings, so that your money doesn’t run out during your lifetime. However, less focus has been given to how often these withdrawals should be made, and the papers have all assumed that the frequency is fixed – usually annually, but occasionally, monthly. A recent paper published by Stephen Horan, of the University of North Carolina (“Optimal withdrawal frequency for sustainable retirement withdrawals”), addresses this issue directly.
Is it better to withdraw monthly, every six months, or once a year?
Intuition might tell us that spreading out withdrawals into smaller, more frequent amounts could help manage risk in retirement. After all, “pound cost averaging” is helpful when you are saving up for retirement, so wouldn’t a similar approach work for retirement income? Making regular, monthly withdrawals feels like the salary which most people had before they stop working, and financing retirement this way has the benefit of familiarity.
However, Horan’s analysis shows that withdrawal frequency has little impact on the sustainability of retirement withdrawals. It’s not often that an academic paper concludes that “it doesn’t really make much difference what you do”!
However, Horan looked more closely into this, and his paper offered a key insight.
Whilst the rate of withdrawals and tax efficiency were the biggest influence, it makes sense to align withdrawal frequency with cash flow needs. He concluded that, the longer you leave your money invested, the more likely it is to achieve additional returns. This applies to relatively short periods – so, if you can put off paying for something, even for a short period of time, then this can have a beneficial effect.
In retirement, it makes more sense to leave the money you need for a large item of expenditure (e.g. a big holiday) in your investment portfolio until you need it, as opposed to “saving up” for it by withdrawing a monthly amount as a holiday budget from your retirement savings. Horan concluded that this is especially important for tax-advantaged savings – such as ISAs and pensions in the UK.
The implication of this is that a bespoke and personal approach to retirement withdrawals is likely to be the best approach. This is the approach which we take with our clients, and, if you would like to discuss this further, please contact us.
If you want to read the original article, here’s the link. https://onlinelibrary.wiley.com/doi/epdf/10.1002/cfp2.1183
Philip Wise | philip@sussexretirement.co.uk
Managing Director and Chartered Financial Planner
This blog is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
The Financial Conduct Authority does not regulate Cashflow Planning.
The value of pensions and any income from them can fall as well as rise. You may not get back the full amount invested.
A pension is a long-term investment and the value is not guaranteed. Any advice or consideration are personal to each individual’s circumstances.
A pension is a long-term investment, the value of your investment an the income from it may go down as well as up. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
