FEDweek

Tapping Your Retirement Portfolio

Studying historic data, investment pros have come up with a method of tapping a retirement portfolio: (1) In the first year, spend 4% of your portfolio. (2) Each succeeding year, increase withdrawals to keep pace with inflation. With a $500,000 portfolio, for example, you’d begin with a $20,000 withdrawal. If inflation is 3%, the next year you’d withdraw $20,600. And so on. Each year your withdrawal increases to maintain your spending power. Such an approach is virtually guaranteed to keep you from running out of money, no matter how long your retirement, based on how financial markets have performed throughout the second half of the 20th Century. That is, you could ride out a re-run of 1973-74 while increasing your spending each year.