How Much Can I Realistically Withdraw From My Portfolio During Retirement?

In the retirement phase, the general concept has been to take 4 percent from your portfolio during the first year, and then increase that number with inflation.  However, with our currently low interest rate environment and increasing life expectancies, this “standard withdrawal rate” has come under greater scrutiny.

In today’s low interest rate environment, studies have shown that following the standard advice of withdrawing 4 percent annually from a portfolio results in a 50 percent chance of running out of money.  Today, the new recommended withdrawal rate is closer to 3 percent.  The result is that one must have a larger portfolio balance at retirement, or reduce income withdrawals, both of which are unrealistic for millions of pre-retirees.

Based on these studies, here is a guideline you may find helpful as you make decisions as to how you will distribute income from your portfolio in retirement, along with some recommendations:  If you find that your annual withdrawal rate, meaning the amount you have to distribute from your portfolio, is 3 percent or less, studies show that you may rely on a traditional, diversified portfolio of stocks and bonds, and your chance of running out of money is less than 10 percent.  However, if your annual withdrawal rate is between 3 percent and 5 percent, you may want to consider incorporating some sources of stable and predictable income into your plan.  However, if your annual withdrawal rate exceeds 5 percent per year, you may want to consider delaying retirement, or at least consider reducing your expenses, as studies show that your chance of running out of money in today’s low interest rate environment is significant.

Portfolio Withdrawal Rate

Less than 3% = Consider a diversified portfolio of stocks & bonds

Between 3%-5% = Consider incorporating some guaranteed sources of income

Greater than 5%= Consider delaying retirement

As an additional resource, this coming Sunday, on Redefining Retirement, we’ll share with you the four phases of saving and investing for your retirement.  You’ll learn what they are, we’ll help you to identify which phase you’re in, and the top priorities you must focus on to get to retirement, as well as to get through retirement.

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