You may have heard us talk about “The 4% Rule”, or the “5% Rule” when we discuss withdrawing from your investment accounts. These withdrawal rates are simple guidelines that can help people understand how much they can reasonably expect to withdraw from an investment portfolio for the rest of their life (adjusting upwards to keep up with inflation).
What you may not have heard though, is how sustainable withdrawal rates are calculated and how they change over time. We create our sustainable withdrawal rate guidelines by running various retirement scenarios through our financial planning software and by comparing our results with those published by other sources. In our most recent update, done this year, we compared our results to a study published by Charles Schwab to see if we were in the same ballpark.
As you can see in the table below, the amount you can safely withdraw from a portfolio largely depends on how long you’ll need the withdrawals to last. For example, if you are 65 years old now and have a life expectancy of 90, that means you would have a 25-year time horizon to provide income for, thus you could reasonably expect to withdraw an average of 4.50% of your investments.
Years of Withdrawals
While we rely on these for very simple illustrations, we strongly encourage going through a personalized financial planning exercise so the numbers can be tailored for your individual situation.