David John MarottaDavid John Marotta is the President of Marotta Wealth Management, a fee-only financial planning and asset management firm in Charlottesville, Virginia. He is an oft-quoted writer and speaker on financial matters and his weekly financial column can be found at www.eMarotta.com
Host: How do you use these safe withdrawal rates in financial planning?
David Marotta: Because we know the safe withdrawal rate at every single age, if you want to retire at age 50, we can tell you what the safe withdrawal rate is at age 50 and therefore you know what multiple of your assets you need in order to have a standard of living that you can live off of at that percentage. So we use them to determine how long you need to work and at what age you can retire and if you want to retire at a certain age, we can tell you exactly how you need to grow your assets to hit that mark. If you were born with a trust fund from your parents and you can live off about 3% of your assets each year then you can retire the day you are born, and some rich people do. So you can also figure out how frugal you need to be able to be in order to retire. So if you can live off 3% of your assets, you can retire, if you are able to be that frugal. So if you have a dollar, if you can live off $0.
03 a year, you could retire. So the question then is at what standard of living can you retire each year and continuing to work will allow you to retire at a slightly higher standard of living because your withdrawal rate will be greater because you have less years to live and also you would have been able to build your assets higher.