You need retirement income. The question is how much money should you take out each year? You want to make sure you don’t spend down your accounts too fast. The answer is determined by calculating a safe withdrawal rate.
What Is A Safe Withdrawal Rate?
A safe withdrawal rate is the amount of money that you can withdraw from your investments each year, with the ability for future year’s withdrawals to increase with inflation, and with a high likelihood that this money will last for the remainder of your life expectancy, even if investments are delivering below average returns.
Calculating A Withdrawal Rate
If you spend $4,000 for every $100,000 you have invested, you would have an initial withdrawal rate of 4%. Traditional calculations say this withdrawal rate is about right; you can spend about 4% of your investments each year and never run out of money.
The latest research, however, provides a different answer, and a set of clear cut rules to follow that will give you the greatest probability for increasing your retirement income.
What happens if you follow these rules? You may be able to have a withdrawal rate as high as 6 – 7% of your initial portfolio value, or $6,000 - $7,000 per year, for every $100,000 you have invested.
The Six Withdrawal Rate Rules
So what are these rules that allow you to maximize your withdrawal rate, and thus your retirement income?
- Withdrawal Rate Rule #1: Your Portfolio Will Deliver A Higher Withdrawal Rate When The Market Has A Low Price to Earnings Ratio
- Withdrawal Rate Rules #2 & #3: You Must Have The Right Proportion Of Equities To Fixed Income And You Must Use A Multi Asset Class Portfolio
- Withdrawal Rate Rule #4: You Must Take Retirement Income Withdrawals In A Particular, Prescribed Order
- Withdrawal Rate Rule #5 & #6: You Must Take Retirement Income Pay Cuts During Bear Markets But When Times Are Good, You’re Eligible For A Raise