One of the most important decisions at retirement is how much to withdraw from savings each year. And because portfolios took a major hit over the past few weeks, this decision is more important than ever.
Setting a withdrawal rate is a delicate balance. Withdraw too much, and you risk outliving your money. But withdraw too little, and you may sacrifice the lifestyle you worked so hard to attain.
Maybe you've heard about the 4% rule, which says if you withdraw 4% of your portfolio in your first year of retirement and adjust for inflation every year, you have a 90% chance of your money lasting for 30 years.
This rule has been tested against thousands of possible outcomes using historical data. So it's no surprise that it works out mathematically. Let's say you retire this year with a $1 million nest egg. You withdraw 4%, or $40,000, the first year, then increase that amount each year by the historical average inflation rate of 3.5%. You'd pull out $41,400 in year two, $42,850 in year three, and on up to nearly $77,000 in year 20 and $108,475 in year 30. With just a 6% annual return on your investments and 3.5% annual inflation, you'd be left with almost $800,000 in 2037, or the inflation-adjusted equivalent of about $272,000.Problem is, the real world is a bit more complicated: Most significant, return figures fluctuate from year to year. Even if your annual returns average out to 6%, your real-world portfolio would look considerably different if in your first year of retirement you experienced a 10% loss -- or a 15% gain.