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Investment Strategy: What’s a Sustainable Portfolio Withdrawal Rate?

If you’re contemplating retirement, chances are one of the biggest questions you have is how much money you can afford to pull out of your retirement nest egg each year. The key here is what withdrawal rate is sustainable: naturally, you want to avoid exhausting your savings while you are still alive. Financial planners call this longevity risk, and it’s a growing problem since people are living longer. In this article, we will discuss withdrawal rates, along with the related issue of how to generate the annual income you need (hint: it’s helpful to distinguish the need for cash from the need for yield).

An appropriate withdrawal rate will obviously differ for someone who is 65 years old versus someone who is 80 and will depend on health and other issues specific to each individual. While determining a withdrawal rate is not an exact science, we thought it would be helpful to apply some numbers to a scenario based on a balanced portfolio to try to determine what a reasonable figure would be for investors to use as a starting point.

To examine a hypothetical investor’s experience under different withdrawal rate scenarios, we looked at a 50/40/10 portfolio – 50% of the portfolio invested in domestic stocks (as represented by the S&P 500 Index), 40% in intermediate term US bonds, and 10% cash reserves – as an approximation of what a portfolio might look like. It’s also important to note that in estimating the amount of income needed from a portfolio, investors should calculate what they need after accounting for other income sources, such as Social Security, pensions, and annuities.

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