The Retirement Distribution “Hatchet”: Using Risk-Based Guardrails To Project Sustainable Cash Flows

One of the questions retirees often have is how much they can afford to spend each year over the course of their retirement without depleting their portfolio during their lifetimes, and financial advisors have many tools to aid in this discussion. One classic technique is the use of withdrawal rates; based on asset allocation and historical return data, advisors can calculate a safe annual portfolio withdrawal rate that retirees can use to guide their spending throughout their retirement. However, this approach does not account for the investment returns the clients actually experience in their retirement; for example, the safe withdrawal rate could increase over time if the client experiences strong investment returns in their first few years of retirement.