### Retirement Withdrawal Strategy

I'm a member of the Motley Fool (I post under the name "Investinginstuff"). Anyway, we were having a discussion about retirement withdrawal strategies. I have to admit that my initial response was wrong. I didn't realize it until I ran a spreadsheet and saw the numbers for myself.

Here's the case:

A guy retires with $2,500,000 in capital. He desires a $100,000 in income the first year. He has his portfolio invested 65% equities and 35% fixed income. We'll assume a 10% rate of return on the equities and a 3% rate of return on the fixed income. To figure out the expected return on the entire portfolio, you simply multiply the allocation percentages by their expected returns and add the numbers together. Like this:

.65 X .10 = .065

.35 X .03 = .0105

Total = .0755 or 7.55%

So, we will assume a portfolio rate of retun of 7.55%. We'll also assume that his income need will increase at the same rate as inflation, which is 3%.

My strategy is to put three years' worth of income needs in a cash account. Then each year, simply withdraw one more year's worth of income from the investment account and put it into the cash account. If he has a really bad year in the market, he could forgo withdrawing money that particular year, giving him flexibility.

Here is my method for looking at the numbers:

The first thing is to figure out his three years of income needs. Here's a look at how his income needs might grow assuming a 3% inflation rate:

A quick summation tells us that he needs to withdraw $309,090 at the beginning of year one to fund his cash account. This is what his annual numbers would look like:

So, as you can see, assuming the assumptions hold true, this guy's portfolio should continue to grow and give him a sizeable amount of income.

Now, it's time for the lovely

Here's the case:

A guy retires with $2,500,000 in capital. He desires a $100,000 in income the first year. He has his portfolio invested 65% equities and 35% fixed income. We'll assume a 10% rate of return on the equities and a 3% rate of return on the fixed income. To figure out the expected return on the entire portfolio, you simply multiply the allocation percentages by their expected returns and add the numbers together. Like this:

.65 X .10 = .065

.35 X .03 = .0105

Total = .0755 or 7.55%

So, we will assume a portfolio rate of retun of 7.55%. We'll also assume that his income need will increase at the same rate as inflation, which is 3%.

My strategy is to put three years' worth of income needs in a cash account. Then each year, simply withdraw one more year's worth of income from the investment account and put it into the cash account. If he has a really bad year in the market, he could forgo withdrawing money that particular year, giving him flexibility.

Here is my method for looking at the numbers:

The first thing is to figure out his three years of income needs. Here's a look at how his income needs might grow assuming a 3% inflation rate:

**YR Income**

1 $100,000

2 $103,000

3 $106,090

4 $109,273

5 $112,551

6 $115,927

7 $119,405

8 $122,987

9 $126,677

10 $130,477

11 $134,392

12 $138,423

13 $142,576

14 $146,853

15 $151,259

16 $155,797

17 $160,471

18 $165,285

19 $170,243

20 $175,351

A quick summation tells us that he needs to withdraw $309,090 at the beginning of year one to fund his cash account. This is what his annual numbers would look like:

** (minus) Ending**

YR Investments Cash Needs Balance ROR Balance

1 2,500,000 $309,090 2,190,910 7.55% $2,356,324

2 $2,356,324 $103,000 2,253,324 7.55% $2,423,450

3 $2,423,450 $106,090 2,317,360 7.55% $2,492,320

4 $2,492,320 $109,273 2,383,048 7.55% $2,562,968

5 $2,562,968 $112,551 2,450,417 7.55% $2,635,423

6 $2,635,423 $115,927 2,519,496 7.55% $2,709,718

7 $2,709,718 $119,405 2,590,313 7.55% $2,785,881

8 $2,785,881 $122,987 2,662,894 7.55% $2,863,942

9 $2,863,942 $126,677 2,737,265 7.55% $2,943,929

10 $2,943,929 $130,477 2,813,451 7.55% $3,025,867

11 $3,025,867 $134,392 2,891,475 7.55% $3,109,782

12 $3,109,782 $138,423 2,971,358 7.55% $3,195,696

13 $3,195,696 $142,576 3,053,120 7.55% $3,283,630

14 $3,283,630 $146,853 3,136,777 7.55% $3,373,604

15 $3,373,604 $151,259 3,222,345 7.55% $3,465,632

16 $3,465,632 $155,797 3,309,835 7.55% $3,559,728

17 $3,559,728 $160,471 3,399,257 7.55% $3,655,901

18 $3,655,901 $165,285 3,490,616 7.55% $3,754,158

19 $3,754,158 $170,243 3,583,914 7.55% $3,854,500

20 $3,854,500 $175,351 3,679,149 7.55% $3,956,925

21 $3,956,925 $180,611 3,776,314 7.55% $4,061,426

So, as you can see, assuming the assumptions hold true, this guy's portfolio should continue to grow and give him a sizeable amount of income.

Now, it's time for the lovely

**DISCLAIMER:***This is meant to be an example or model ONLY. Invest at your own risk.*
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