A depleted portfolio needn’t ruin your retirement. Suppose that Bob and Carol Walker are a couple about to retire. In 2009, the average Social Security benefit for a retired couple is $1,876 a month, which is about $22,500 a year, indexed to inflation. If one spouse gets a federal pension, the Walkers might start their retirement with income of $45,000 or more, not including anything from their portfolio.
Assume the Walkers had $500,000 worth of investments a year ago. They planned to follow their advisor’s suggestion and start with a 4 percent portfolio withdrawal. Then they would increase withdrawals to keep pace with inflation.
This plan would have generated another $20,000 (4 percent of $500,000) in their first year of the Walkers’ retirement, giving them $65,000 of total income, in this hypothetical example. If this couple had a diversified portfolio, tilted towards stocks, it might be worth only $350,000 now, after a 30 percent loss. Their 4 percent withdrawal would be $14,000 in Year One (4 percent of $350,000), not $20,000. Thus, the Walkers would see their first-year planned retirement spending fall from $65,000 to $59,000: a drop, but not severe enough to destroy their lifestyle.
What’s more, drawing $14,000 from a $350,000 portfolio leaves $336,000 for potential growth. If stocks rebound, the Walkers will be able to increase the amount they pull from their portfolio in future years.