How much can I withdraw per year from my retirement account?

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This is a great question which I believe far too little time is spent thinking about.  In their post “Living to 100 and Beyond: Creating the Infinite Portfolio” The blog “Invest It Wisely” is one of the only places where I have seen this question addressed.  The blog deals with the question from the standpoint of how to create a retirement investment portfolio which has an “infinite” lifespan.

At the root of this exploration are two very human aspirations:

  1. To have income for one’s entire life
  2. To pass along one’s life savings to the next generation, intact.

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Are these goals reasonable and doable?

Well, I guess it depends on how much money you have. The more money one has, the more gains one’s retirement portfolio will generate.  The more gains, the less likely that one will have to go into principal to pay for living expenses. I don’t think this is a reasonable goal for most people with retirement savings of less than $2 Million.  Perhaps a more reasonable goal would be to figure out how to make one’s money last to age 85 or 90. However, I think delving into the question of creating an “infinite portfolio” is still educational for anyone thinking about making their money last.


There are two important factors that you control with your retirement account:

  1. What types of investments the account holds.
  2. How much you withdraw (or deposit) per year.

The article focuses on the second of these factors.

Invest it Wisely gives three scenarios assuming a 3%, 4% and 5% annual withdrawal rate.  If you had a portfolio of $1,000,000, under the 3% scenario you would be taking out $30,000 per year. Which of these withdrawal rates will give you a portfolio that:

  • Can provide you with income until you die.
  • Can withstand a financial hurricane like occurred in 2008.

The article says that a 3% withdrawal rate will give you an “infinite” portfolio.  On the other hand, 5% might lead to a portfolio that does stand the test of time.  I am not sure that I agree with this analysis.


There are two key assumptions in this analysis that are important to understand:

  1. What does a financial hurricane look like?
  2. What is the assumed annual rate of return?

The problem with the analysis is the assumed annual rate of return.  Historically, the assumed rate of return for stocks has been around 7%.  Between dividend payouts and price appreciation, a $100 investment in stocks would be worth $107 on average per year.  The historical rate of return on bonds is lower, about 5%.  A blended portfolio of stocks and bonds would therefore provide a rate of return of around 6%.

However, there is growing concern that a 6% rate of return might be overly optimistic.  Bill Gross, the manager of the largest mutual fund in the world, has said he sees bonds providing 2% and stocks  4% annual returns in the future.  If he is right, a 3% annual withdrawal rate will not lead to a portfolio that will last forever.

Assuming a withdrawal rate of 3% and a 3% rate of return, the value of your portfolio will not change, as the money going out equals investment returns.  However, we must plan for a financial hurricane.  Every 8 to 15 years, the market takes a major tumble (1987, 2000, 2008) wiping out a major portion of a portfolio’s value.

Assuming a financial hurricane hits and wipes out 40% of the market value of a portfolio, that million dollars is now only $600,000.  Unfortunately, you will probably need to keep taking $30,000 per year (which now represents 5% of the portfolio’s value). If the portfolio has total returns of 3% per year than it will produce $18,000 in gains. This is much lower than the money which is going out of the portfolio and will lead to the portfolio’s value diminishing over time.


The Bottom Line:

Its very important to understand the assumptions such as “annual rate of return” when planning for retirement.  Recently, state pension funds have needed to scale back their assumptions for rates of returns.  However, state pension funds have been very reluctant and slow to change these assumptions.


Because, by changing these assumptions, state taxpayers will need to pay $100s of billions more into the pension funds to cover liabilities.  In short, when you scale back your rates of returns, it always means that you will have to put away more money. The key is having reasonable and rational assumptions of returns.

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Marc Prosser


  1. Let me suggest an alternative model for the withdrawal rate, one used by most universities, that guarantees an infinite lifetime. You have retirement savings. You are retired. At the start of each year (exact date depends on some tax law issues; consult an advisor) you calculate 5% (or whatever) of how much money you have put away *this year*. For example: You have $100,000 put away. Your rate is 5%. At the start of the year, you take out $5000. Next year, the market goes up. You made 15%, and have $110,000 in the account. You take out 5%, or $5500. The third year, the market crashes. You now have $60,000 saved. Once again, you take out 5%, or $3000. Universities call this the “return rule”. Unlike the ‘keep spending and ignore that the market has crashed’ approach, you reduce your spending to match the market going down. The result is that the predictability of the income is reduced, but the security of having at least some income becomes very large, assuming solid investing practices.


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