How Much Can I /Should I Withdraw Annually From My Retirement Account?
This question is one of the most common ones we hear from both clients and prospective clients. And as most of you know, the answer is “it depends.”
There was a recent article written by Craig L Israelsen and published by Financial Planning which attempts to apply data and science to this question and the answer – all of which we love. If you love the data and science too, a link to the article is included. For the rest of you, just read on….
As many of you know, the standard wisdom has said that, based on historical market returns, the average retiree can withdraw 4% per year from a retirement account and not risk running out of money in the account in the average 25 years of remaining life.
The study described in this article took a much deeper dive:
considered 34 25-year time periods between 1961 – 2018 with a starting portfolio value of $1MM
used a standard portfolio mix of 40% large cap U.S. equities/20% small cap U.S. equities/30% bonds/10% cash
assumed no required distributions (i.e. Roth IRA)
looked at 15 different withdrawal rates from 1% to 15%, withdrawn at end of year
And the results:
in no scenario studied, was the portfolio at 0$ (or less) at the end of 25 years, even with a 15% withdrawal rate. Obviously, that doesn’t mean it can’t happen – it just didn’t in the years studied.
Not surprisingly, the sequence of “good” years vs “less good” years matters. Portfolios which have the good years at the beginning of the 25 years did markedly better than those which had the good years nearer to the end of the 25 years.
At the standard 4% per year withdrawal rate, the average ending portfolio balance was just over $4 million with a range of $1.8 million to $9.4 million!
The optimum annual withdrawal rate for the scenarios studied was 8%. At this withdrawal rate, the average ending portfolio value was a very healthy $1.5 million and the highest annual withdrawal.
This is a good read! Our answer after reading… “it depends”.
Lori
https://www.financial-planning.com/news/the-ideal-annual-withdrawal-rate