What percentage of your nest egg should you withdraw each year in retirement? This is a critical question. You want to live comfortably, but not so comfortably now that you end up eating government surplus cheese in your final years. Here's some information drawn from the work of TMF Pixy:
Many formulas will help you plan, but they rely on average rates of return and inflation. Over the long term, an average rate should work, especially when you're still saving for retirement. Unfortunately, actual year-to-year results won't be the same as the average and, for retirees in some time periods, those yearly variations may prove devastating. In other words, one 15-year period might average a 14% annual return, while another 15-year period might average just 2%. The longer the time period you're dealing with, the less the overall average return rate should fluctuate.
When you start withdrawals is just as important as how much you take. Whether the market is surging or slumping in your first years can make a big difference. Since we can't predict the future, what's the right percentage to withdraw?
Three Trinity University professors -- Philip Cooley, Carl Hubbard, and Daniel Walz -- examined this issue by looking at historical annual returns for stocks and bonds from 1926 through 1995. Not surprisingly, their study revealed withdrawal periods longer than 15 years dramatically reduced the probability of success at withdrawal rates exceeding 5%.
They also concluded that:
- Younger retirees who anticipate longer payout periods should plan on lower withdrawal rates.
- Owning bonds decreases the likelihood of going broke for lower to mid-level withdrawal rates, but most retirees would benefit with at least a 50% allocation to stocks.
- Retirees who desire inflation-adjusted withdrawals must accept a substantially reduced withdrawal rate from the initial portfolio.
- Withdrawing 4% or less from a stock-dominated portfolio is probably too conservative.
- For payout periods of 15 years or less, a withdrawal rate of 8% to 9% from a stock-dominated portfolio appears sustainable.
According to many studies, a "safe" withdrawal rate would amount to between 4% and 6% of a retiree's starting portfolio. Withdrawal rates above 5% increase the probability that a retiree will go broke in her lifetime. Many studies also agree that the presence of bonds provides a measure of stability absent in an all-stock portfolio.
Additionally, it appears that inflation-adjusted withdrawals fare best at lower-to-midlevel withdrawal rates.
Learn much more about retirement topics in our Retirement area. (For more on withdrawals, scroll down on that page to the "Managing Your Retirement" section.) Our Rule Your Retirement newsletter may also be of interest. It offers a lot of guidance to help you set yourself up for a comfy and enjoyable retirement, as well as specific investment recommendations. Try it for free and see for yourself -- it's a fun, easy, single-sitting read.
