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Better Safe Than Broke
The issue of a safe withdrawal rate in retirement has only recently come under intense examination, due to the invention of very high-powered electron microscopes that can peer into your wallet. One study examined this issue by looking at historical annual returns for stocks and bonds from 1926 through 1995. The results were published in the February 1998 issue of the AAII (American Association of Individual Investors) Journal. Excellent commentaries on that study may be found in the Trinity Study by Scott Burns (he links to a few columns he wrote for Worth magazine), and in the Retire Early website's article, "What's the 'Safe' Withdrawal Rate in Retirement?"

In general, these studies (along with other commentary that unfortunately we can't link to online) conclude that, based on historical returns and inflation, you would probably be fairly secure if your first withdrawal from your retirement investments is between 4% to 6% of the portfolio's value. That amount, as adjusted each year thereafter by inflation, should ensure your capital will not be exhausted in your lifetime. That will depend largely on your life expectancy, your portfolio allocation, and pure luck. Retire and begin withdrawals in years when the stock market is down, and the chances of exhausting your capital increase. Keep too large a portion of your investments in fixed income vehicles, and that chance similarly increases.

What's a Fool to Do?
We'd love to be able to tell you exactly what withdrawal rate you should use when you retire. Unfortunately, as you can see, t'ain't that simple. The rate you use will depend on how long withdrawals must continue; whether you will take an initial withdrawal and adjust that amount in each successive year by inflation; whether you will take a fixed percentage of your portfolio each year and allow your annual income to fluctuate; and a host of other factors.

To help you form your own opinion on the topic, we've listed a wealth of resources (some free, some not) at the end of this lesson.

Emergency Planning
What if you get hit by high inflation or other economic calamity? Are there things you can do to get back on course? This is another one of those issues with no "right" answer, other than remaining relatively conservative in withdrawal rates early in retirement and loosening up a bit later if the economy indicates one can do so. If, as we advised earlier, you keep that three to five (or seven) years' of income out of stocks, you should be able to weather the storm. If you get hit with high inflation and low returns for a number of years -- say sayonara to the good life, and then move in with the kids! We're just kidding (for the most part), but you should consider how you'll reduce your standard of living should things go wrong.

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