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Retirement Withdrawal Strategies: The Safety First Approach

Published: July 14, 2021, 10 a.m.

One of the biggest questions of retirement is how to withdraw your money. You can\\u2019t have a successful retirement without\\xa0first planning\\xa0how to withdraw your money. That is why we are discussing different retirement withdrawal strategies this month.\\xa0Last week\\xa0we covered the infamous 4% rule and today you\\u2019ll learn about the safety-first approach. In our next episode, you\\u2019ll hear about a hybrid approach and in the last episode of this series, you\\u2019ll\\xa0discover how\\xa0to build a framework for your own retirement withdrawal strategy. Are you ready to educate yourself on the various ways that you can withdraw your money in retirement? Press play to get started.\\xa0

What is the safety-first strategy?

In the previous episode, you learned about a safe withdrawal strategy using the 4% rule. Whereas the 4% rule is a portfolio-based strategy, the safety-first strategy takes the opposite approach. Safety first ignores safe withdrawal rates and asset allocation. Instead, it focuses on creating income sources via various guaranteed income vehicles. The idea behind the safety-first approach is that retirement is too important to have variables like sequence of return risk that could ruin your retirement.\\xa0

How to implement the safety-first approach\\xa0

Since you only get one shot at retirement, the safety-first method secures a base income by using the assets you have. Prioritization is a key component to safety first. The first thing one must do to utilize the safety-first approach is to calculate your base needs over the span of your lifetime. Once you have this number, then you\\u2019ll subtract the income from your social capital so that you can see what\\u2019s left. With safety-first, you will secure your base needs by utilizing bond ladders or income annuities. After creating your income floor, then you can focus on building your contingency fund to help with life shocks. Once both of these bases are met then you can focus on any other retirement goals you may have.\\xa0

What are the advantages to safety-first?

The first advantage that comes to mind with safety-first is peace of mind. By using the safety-first approach you won\\u2019t have to worry about the markets because you know that no matter what happens your base needs will be met. Another advantage is that this approach is easy to manage. There is not much to do after you have the plan in place but collect your monthly paycheck which makes this plan ideal for later in life. One more advantage is that since your needs are met you can focus on being more growth-oriented with the rest of your portfolio.\\xa0

The disadvantages of this approach

The main disadvantage that I see with this approach is the lack of flexibility. If you have listened to the show before, you know that my methodology is all about staying agile. People change their minds a lot and life can completely change after retirement, so tying up your assets in an annuity can take away the power to change your mind. Another downfall to safety first is increased inflation risk. Most annuities do not adjust for inflation, so if there are any spikes in inflation you could be at risk. Listen in to discover if the safety-first approach is the right one for you.\\xa0