How much can I withdraw from my retirement savings each year?
Choosing a withdrawal rate can be as important as how much you have saved before retirement. It is critically vital that you don’t take too much, but you want to take enough to live comfortably and enjoy retirement. The best way to determine your withdrawal rate is to work with a financial planner. Your portfolio return is the deciding factor in developing a withdrawal strategy. Therefore, you should first have confidence in your long-term investment strategy. Once you have that in place, you must decide a projected rate for inflation. Subtract that from your projected portfolio return and you will have your withdrawal rate.
How can I determine my projected portfolio return?
No one knows what your portfolio will yield over the next 10, 20, or 30 years. This is the greatest challenge of retirement planning. You can, of course, trade in your uncertainty by purchasing an annuity. Buying an annuity will lock in a given rate of return, provided the payout is guaranteed. I do not believe this is necessary for all investors, but for some retirees this dramatically reduces stress, because they no longer need to participate in the stock market.
Vanguard is a reputable source for projections
Vanguard publishes an annual “What to Expect” from markets that could be useful. They are not attempting to project the next year, but rather the long-term returns for global stocks and bonds. In 2019 they project:
4-6% per year for US Stocks
7-9% per year for International Stocks
2-4% per year for global bonds
These numbers would give us a range of returns between 3.8% and 5.8% for a portfolio of 60% stocks and 40% bonds (20% of portfolio in International stocks). I believe you will be able to do better than that if you have allocated a reasonable amount of your stocks to smallcaps. If we assume an inflation rate of 2%, we would end with a withdrawal rate between 1.8% and 3.8%. This is probably a realistic projection for a market-cap weighted portfolio. You may be able to enhance returns significantly by diversification of your portfolio by market cap and style.