June 29 2020 – excerpt from the EdgePoint Academy
Most of our working life, we have plenty of expenses to cover – from buying a car and home to starting a family, paying for the kids’ education and maybe sneaking in a vacation here and there. Whatever money is left over, we try to save.
After decades of saving, it’s time to start spending once you enter retirement. But how much can you safely withdraw each year without needing to worry about running out of money? The answer is critical in determining how long your savings will last you.
In your accumulation phase, your savings rate is the make-or-break number: Save too little or too late and you’ll be hard-pressed to make up your savings shortfall. When you retire, your withdrawal rate is the equivalent make-or-break figure. Withdraw too much from your portfolio and you’ll run the risk of running out of money prematurely.
What’s a sustainable withdrawal rate?
It’s the amount of money you can withdraw from your portfolio of stocks and bonds in retirement with an acceptable risk of running out of money. It’s expressed as a percentage of your portfolio, such as the popular “4% rule”.i This particular guideline suggests that if you start withdrawing 4% of your assets in the first year of retirement and then index these withdrawals to inflation in the following years, the risk that you would run out of money before your 30-year retirement ends is reasonably low.
Let’s go back to Anna, our diligent saver from the previous articles, who retires at 65 with $773,435 in savings. According to this rule, she should withdraw 4% (or $30,937) in the first year of retirement. Each subsequent year, the amount withdrawn increases by the rate of inflation so she can maintain her purchasing power. The chart shows what these withdrawals would grow to, assuming a 2.5% inflation rate, 15 and 30 years later.
To read the rest of the article click here >> The Retirement Income Balancing Act