What is a withdrawal strategy typically based on?

A withdrawal strategy that is based on a percentage of assets each year allows for a dynamic approach to withdrawals, which can adjust with the performance of the investment portfolio. This method is often seen as more sustainable over the long term because it aligns the withdrawals with the current value of the portfolio, providing flexibility in response to market fluctuations.

By withdrawing a percentage, clients can potentially preserve their capital during down markets, as the withdrawal amount naturally decreases when the portfolio value falls, which can help manage longevity risk—the risk of outliving one's assets. This strategy can adapt to the growth of the portfolio, allowing for adjustments in withdrawals in years when the portfolio performs well, thus maintaining a balance between spending and saving.

This approach helps address both income needs and market conditions without locking the client into a fixed dollar amount, which may not be sufficient in bullish years or too burdensome in bearish years. The focus on a percentage can make the retirement strategy more resilient and aligned with the investment's trajectory.