Rethinking Retirement Planning: Beyond the Safe Withdrawal Rate
Rethinking Retirement Planning: Beyond the Safe Withdrawal Rate
Last week, we explored how the safe withdrawal rate shapes retirement spending and why personalizing your approach—using tools like RISA—can make a real difference.
This week, we’re shifting focus to the savings phase: instead of just asking How much can I spend in retirement? we look at How much should I be saving now? By emphasizing the safe savings rate, we see how disciplined, long-term saving can be more stable and reliable than simply aiming for a withdrawal target. This perspective connects your entire financial journey—from working years through retirement—and helps you plan with greater confidence.
Why the “Safe Savings Rate” Matters More Than You Think-How Early and Consistent Saving Can Shape Your Future
When it comes to planning for retirement, most discussions focus on the safe withdrawal rate. This is how much you can take from your savings each year without running out of money. The classic 4% rule has long been a staple, but recent research and market changes have led experts to revisit this approach, with some now recommending a lower starting rate, such as 3.7%. But is this really the best way to think about retirement planning?
The Limits of the Safe Withdrawal Rate
The safe withdrawal rate is important, but it’s only one piece of the puzzle. By focusing solely on how much you can withdraw in retirement, you risk isolating the accumulation (saving) and decumulation (spending) phases of your financial life. In reality, these two phases are deeply connected.
Interestingly, the lowest sustainable withdrawal rates (what we think of as “safe”)often follow long bull markets, while the highest sustainable withdrawal rates tend to come after bear markets. This means the rules of thumb can change based on what’s happening in the markets when you retire. If you base your plan on a withdrawal rate alone, you may end up with a plan that’s either too conservative or too optimistic, depending on when you start retirement.
The Power of the Safe Savings Rate
Instead of fixating on the withdrawal rate, many experts suggest focusing on the “safe savings rate.” This is the savings rate that, when maintained throughout your working years, gives you the best chance of supporting your desired lifestyle in retirement—regardless of market conditions at the time you retire.
A safe savings rate is less volatile than a withdrawal rate. It’s based on historical simulations that look at both the accumulation and decumulation phases of retirement planning. In other words, it considers your entire financial journey, not just the end. This approach can help you avoid the pitfalls of being overly conservative or aggressive at the wrong time.
How to Use the Safe Savings Rate in Your Plan
There isn’t a universal “safe savings rate” like the 4% rule, but there are guidelines you can follow. The key is to start saving early and consistently. Even if you don’t know exactly how much you’ll need at retirement, maintaining a reasonable savings rate throughout your career will give you the best chance of reaching your goals.
Here’s the bottom line: Your retirement plan should focus on the process of saving, not just the outcome of how much you can withdraw. By sticking to a disciplined savings plan, you’ll be better prepared for whatever the markets—and life—throw your way.
While the safe withdrawal rate provides a useful starting point for retirement planning, it’s important to remember that everyone’s needs and comfort levels are different. This is where the Retirement Income Style Awareness (RISA) framework comes in: by helping you identify your unique retirement income style, RISA ensures that your withdrawal strategy fits your personal preferences for flexibility, risk, and security. In short, RISA helps you move beyond rigid rules to a more personalized, confident approach to managing your retirement income.
Ready to Build a Plan That Works for You?
Ready to put a disciplined savings plan into action? Whether you’re curious about the safe savings rate or want to discuss your own retirement goals, Bay Point Financial is ready to guide you. Let’s work together to create a plan that fits your life.
