Throughout the years, there has been much discussion regarding an optimal retirement withdrawal rate. A withdrawal rate is a function of how much money you withdraw from your retirement fund each year. I’m sure many of you have heard of the oh-so-popular 4% withdrawal rate standard. Some experts have suggested a lower rate given low bond yields, while others have suggested a variable rate that gives retirees more flexibility depending on market conditions. Many assert that investors are better off choosing a first-year retirement withdrawal percentage and then growing the withdrawal amount each year to keep pace with inflation. However, this can be tricky. What if you choose the wrong initial rate? If you choose a rate that is too high, you face possible shortfall risk (the risk of running out of money within your lifetime). If you choose a rate that is too low, you might not be taking full advantage of your retirement savings.
Instead of focusing on a specific withdrawal rate to use throughout retirement, you could calculate how much you can afford to withdraw annually in retirement based on the amount of money you want to have left over for your estate, how many years you estimate you will be in retirement and estimated inflation and rate of return. CI’s Retirement Withdrawal Calculator does just this.