When it comes to retirement, you want your portfolio to last at least as long as you do. From BlackRock comes a useful table for estimating how long your portfolio will last, given return and withdrawal rate assumptions:
(Click to enlarge)
It is very interesting that choosing a 5 percent withdrawal rate rather than 6 percent resulted in an additional portfolio life of 11 years in this study! A client who has amassed $1 million may be feeling like they must be set for retirement. However, when they realize that this means $50,000 a year (increased annually for inflation), they may no longer feel so good. The earlier that clients begin to think about the concept of withdrawal rates, the more time they will have to affect the absolute value of those withdrawals (through saving and investment decisions) and be able to set themselves up for a comfortable lifestyle.
This is a horribly flawed and over simplified example of sustainable withdrawal rates for retirees:
1. There is no accounting for the volatility of the portfolio, which is just as important as the growth rate when a portfolio is supporting withdrawals.
2. This doesn’t address the fact that current stock and bond markets are likely to have much lower future returns given the current valuations.
3. Both 5% and 6% are almost ludicrous withdrawal rates if you don’t want to outlive your money. Try 1.5-2%
Read Finke & Pfau‘s recent paper “The 4 Percent Rule is Not Safe in a Low-Yield World” should help shed some light.
Perhaps you should look at the formula that I use:
Inflation Rate, say 3%
Plus: 4.263%
Or: 7.263%
Using a growth of 5-8% annually will yield enough of your $1 million and leave more for your inheritors.