How Much Can I Realistically Withdraw From My Portfolio During Retirement?
About the author: Chris Abts is the President & founder of Cornerstone based in Reno, NV. He helps people to better manage their wealth so they can focus more of their time on what truly brings meaning and fulfillment to their life. Abts is also a best-selling author and TV show host of Redefining Retirement, which airs every Sunday evening at 5:30pm on KTVN Channel 2.
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.