The simple answer is to not draw more out than you are earning on your portfolio. However for most people, it is not so simple. Market volatility, increased longevity, and inflation risk all have an impact on a portfolio’s ability to supply adequate retirement income. Ideally, your withdrawal rate is below the average annual rate of return on the portfolio minus inflation. If inflation is at 3% and your annual portfolio returns are 8%, then your withdrawal rate should be below 5% to ensure your portfolio keeps up. The sequence of returns is extremely important: withdrawing too much early in retirement can have a lasting negative impact in your twilight years.
Authored by: Ben Leyhew, MBA, LPL Wealth Advisor