You may not have heard the term “systematic withdrawals” too many times before. But that’s about to change. In fact, I’d like these two words to be a central part of your financial vernacular. That’s because systematic withdrawals might just be your secret weapon in the battle to maximize your retirement income. Once you understand the concept it opens up an entirely different way to invest and create income. No time to waste. Let’s get to work.
What Are Systematic Withdrawals?
A systematic withdrawal is as simple as it sounds. It involves taking a set amount out of your account at set periods of time. So if you arrange to have $2,000 withdrawn from your account every month that is an example of a systematic withdrawal. I told you it was a breeze.
Why Is It So Important?
As simple as it is, this approach changes everything about income and investing. Think about it. Most people who need income invest in CDs, bonds, preferred or dividend paying stocks and use the interest or dividends as income. That’s a small universe of alternatives.
Many people who need income-producing investments completely forget about tapping into equity growth funds because they don’t know how to wring income out of them. But if you use systematic withdrawals you can easily turn your equity growth into income producing investments. Just set up your account for a monthly withdrawal and collect your checks. Each month a little of your fund will automatically be sold off and sent your way. Snappy and sweet.
What is the risk?
One risk of setting this up is you might withdraw too much. But there is a possible solution. One rule of thumb many advisors use is to set annual withdrawals at 4% or less of your equity account value each year.
As I explained in this post, using this approach your income will fluctuate. As your account value climbs and falls on a yearly basis so does your income.
But if you invest the money correctly and withdraw no more than 4%, you probably won’t ever exhaust your capital. It could happen but it’s not likely. There will be years where your account losses value and you take out the 4%. During those years your account value will decline 4% more than the market. Those years might be stressful. But overall and overtime, the picture looks pretty rosy.
In fact, the odds are good that despite these withdrawals, your account value and annual income will rise significantly over time.
I use this strategy all the time. And while the past is no guarantee of future results, it’s been a game changer. Have there been years when income drops? Yes. 2008 is a good example where the people who used this strategy took a painful haircut to their income checks.
But over time the income has increased substantially. Look at the hypothetical on the link I provided above. It shows just how quickly and substantially the income grew historically.
This is no guarantee of future results and they graph I showed is just a hypothetical. But it demonstrates the positive and negative side of this method.
Do you use systematic withdrawals for your accounts to create income? If so, how has it worked for you? Would you do anything differently? What is it?