How Much Can I Withdraw from My Retirement Portfolio?

Many studies have been done over the last twenty years in an attempt to find a magic number - a no-fail sustainable withdrawal rate - one that would let you take an inflation-adjusted withdrawal from your portfolio every year without ever running out of money no matter what.  This is a nice thought - but life often complicates even the best laid plans.

First, probability is no guarantee.  Let's look at a 5% per year withdrawal rate.  In a 60/40 portfolio under typical market conditions, most number crunchers would agree that the portfolio should last thirty or more years.  Change market conditions to "extended poor markets" and you would likely be out of money before the twenty-four year mark.  If you had started withdrawing at age 62, you could be out of money before 86.  With one out of two seniors likely to live past age 90, this is not ideal.

Second, basing your retirement income on a magical number also misses the point of having a diversified investment portfolio - which is presumably to grow or accumulate money while maintaining the flexibility to respond to whatever life has in store for you.  Better to cover your 'basic' (i.e. bare minimum) living expenses another way and let your portfolio be the 'gravy'.
Consider a retirement income strategy that optimizes a variety of retirement resources and strategies.  You will want to talk to your personal financial planner and tax advisor to see what might work best for you.  Here are a few ideas to consider: 

• Keep enough money in bank or credit union accounts to cover emergencies and any large upcoming purchases.
• Cover your basic living expenses with guaranteed income streams like social security retirement benefits, pensions and the like.
• Replenish your bank accounts via withdrawals from your investment portfolio at the end of 'good years' and avoid withdrawals following 'bad years'.
• Delay social security and spend down taxable investments instead.  (You will want to have your planner run the numbers on various social security claiming strategies first.)
• Keep tax-deferred investments deferred for as long as possible.  (This might not apply if you have considerable tax-deferred assets.)
• Rebalance your long-term portfolio at least once each year - forcing yourself to sell some of your winnings and buy things that are 'behind'. 
• Mix it up!  Diversify your long-term portfolio beyond the traditional asset classes and types.
• Commit a portion of your investments to high-quality dividend-paying investments and supplement your income with the dividends.
• Fully fund Roth accounts prior to retirement so that you may have the option of taking 'tax-free' withdrawals in the future. Make sure to learn all the rules that apply.
• Fully fund a Health Savings Account if you are in an eligible high-deductible health plan prior to retirement.  Contributions are deductible and grow tax-free.  Better yet, withdrawals for health expenses are tax-free after retirement.
• Understand NUA if you have employer stock in your employer plans.
• Never forget the impact of income taxes!  Tax-efficient investments and a tax-sensitive withdrawal strategy will stretch your resources even further.