The oft-cited “rule of thumb” is that a person can withdraw 4% off their portfolio for retirement income and not run out of money for their lifetime. This would theoretically allow the additional growth to be reinvested and therefore the 4% in the future would keep pace with inflation. This is a good “rule of thumb” with which to abide.
One problem with this, of course, is that the markets fluctuates and one never knows which year it’s going to fluctuate downward. If you retire and the first two years produce negative returns, that 4% that you planned on may be much less than you had previously calculated. Therefore, it’s a good idea to have a liquid nestegg that you can depend on for the first couple of years so you can allow your “serious” money to grow, no matter what the markets do.
The fact is, given all the unertainties in retirement – how your investments will perform, what your actual expenses will be, how long you’ll live – you can’t pick the ideal withdrawal rate in advance. You’ll either deplete your portfolio more than you had intended or you’ll leave behind money that you could have enjoyed. A much better strategy is to use the 4% figure as a guideline and then adjust as time goes by. Repeat the process of adjusting your withdrawals each year. If a market downturn has depressed the value of your nest egg so much that the probability of your money lasting has significantly declined, forgo an inflation adjustment or trim your withdrawals for that year. When the markets have done well, you may be able to boost your withdrawals and indulge yourself.
The key is to remain flexible. Source: Linda Barlow, CFP
For more financial articles, please visit Women Investing in Security and Eduaction, WISE webiste at http://www.wise-investors.org.