| 10 February 2012
The amount that can safely be withdrawn from your retirement portfolio each year has been a much debated subject in financial planning circles for years. The rule of thumb you typically hear is that 4% a year is a safe withdrawal amount, but where did this come from, and is it right for everyone?
The 4% rule became popular from a research study done in the mid 1990s by California financial advisor Bill Bengen. I know Bill personally as a fellow NAPFA member, and I attended some of his earliest presentations on this topic but what most retirees don’t realize is that his work was based on a very aggressive 70% stock portfolio at a time of fairly high stock returns. Most retirees I know would not have held this aggressive of a portfolio during the last 10 years and in fact Bill lowered his own client’s allocation to stocks during this time.
Some things you should consider when deciding the proper annual withdrawal amount are: Is most of your retirement money in IRAs? If so, then you will be taxed as regular income on your withdrawals thus, you will have less spending power. Are you in a state with a high income tax? How conservative is you portfolio? How much do you want to leave to your estate?
Christine Benz has an in depth article on Morningstar.com titled, Should Your Retirement-Portfolio Withdrawals Fluctuate With the Market? I believe you will find this helpful.