Advisors wrestle with telling people entering retirement just how much money they can spend each year without either the amount being too much (running out of money) or too little (losing the enjoyment of your savings efforts).
There have been many studies on this topic and it has been widely discussed among financial professionals and academics over the decades. What has come out of all this are some rough guidelines.
Several factors should be considered:
- How are the accounts invested?
- How old will you be when you start retirement?
- What is a reasonable distribution rate for portfolio withdrawals?
- Should adjustments be made once you start taking withdrawals?
Many advisors (us included) start with the premise that the worst possible outcome is to run out of money at an advanced age. So, we look back historically at all types of investment markets to see how various mixes of investments (mostly stocks and bonds) would have fared over decades of retirement distributions. Although not exact, the results of these studies suggest that over the last 70 to 100 years, a portfolio with 50 percent to 70 percent in stocks and the remainder in fixed income would last at least 30 years if 4 percent of the starting amount were withdrawn every year. The vast majority of portfolios would not run out of money during that time (and many would grow), but we always start with considering the worst case scenario when creating a financial plan.
However, this 4 percent rule must be considered in conjunction with the other factors stated above. If the portfolio is growing, then distributions could potentially be increased to keep pace with inflation. Another consideration is your age at retirement. Someone retiring in their 50s might want to start distributions at 3%. Conversely, a retiree starting at 75 could begin distributions at 6% and likely be in the safe zone.
In any event, your retirement portfolio should be carefully monitored with your financial planner. Distribution levels should be revisited and discussed on a regular basis as you progress through your retirement years.