What is a Safe Withdrawal Rate from Retirement Savings?
There is no one right answer. I've heard people say 2% (which seems really low to me) all the way up to 10% (which seems really high to me)! The main thing to keep in mind is that unless you want to eat into your principal, make sure you withdraw less than your rate of return. Naturally, the better your rate of return, the greater percentage you can withdraw without eating into your principal.
Of course your portfolio rate of return depends on your investment strategy and your risk tolerance. In order to define your risk tolerance, you must know what your defintion of risk is. To many people risk is defined as loss of principal. However, many people forget to factor in the effects of inflation, which results in the loss of purchasing power. For instance, you could take $100 and stick it under your mattress. Now, you probably don't face much risk of losing your $100. However, in one year, your $100 is only worth $97. That's a loss isn't it?
So, it is important to construct a retirement portfolio that is balanced, giving you the stability of income-producing investments and the growth of equities. The mix depends on how much portfolio fluctuation you can stomach.
In my next post, I'll discuss different withdrawal percentages and portfolio rates of return.
Until next time...