HOW MUCH CAN I WITHDRAW?
As you start down your retirement journey one the first questions you may ask is “have I saved enough?” But logically the question should be “how much do I need?” This is because the amount you should have saved depends how much you need from your portfolio.
It’s important to note that there is a difference between how much can you withdraw and how much do you need to withdraw to meet your goals. How much you need to withdraw is entirely specific to your situation. Maybe you will have to take more early in retirement before you go on Medicare or claim Social Security, or maybe you still have some debt to clean up. If you have a pension you may have to take less or if you like to travel you may have to take more.
But rest assured there is an answer! How much can you withdraw is solved by using the time value of money formula solving for the payment function (in Excel =PMT(I,N,-PV,FV,1). You will need 4 variables to figure out your number:
PV-how much money do you have saved?
FV– how much do you want to pass on? (if any)
N– how long do you project to live
I– what rate of return do you expect to make?
Let’s review some of these variables in action!
- FV– How much of your portfolio do you want to spend? Do you want to leave some to your children or a charity? Do you want to spend ¼ of your savings? ½? ¾? Or do you want to just spend what you make each year?
Example: compare John & Mary (70) to Mark & Sue (70) who both have $800,000 invested in the same portfolio earning 5% per year. John & Mary only want to spend down ¼ of their assets, but Mark & Sue are comfortable spending down ¾ of their assets. Assuming both couples live to age 95 here is what the math tells us:
John & Mary can only take out $42,086 annually [=PMT(5%,25,-800000,600000,1)]
Mark & Sue can take out $50,068 annually [=PMT(5%,25,-800000,200000,1)]
- N– Numbers of years in retirement. The later you retire the more you will be able to withdrawal.
Example: compare Jack & Linda (70) to Eric & Connie (50) who both have $950,000 invested in the same portfolio earning 5% per year. Assuming both couples are comfortable spending down ¾ of their portfolios and live to age 95 here is what the math tells us:
Jack & Linda can take out $59,455 annually [=PMT(5%,25,-950000,237500,1)]
Eric & Connie can only take out $49,487 annually
- I– Interest rate. How much risk are you willing to take? Are you in CDs at the bank? Are you heavily invested in bonds? Or are you in a growth portfolio?
Example: compare Alex & Kate (65) to Doug & Ann (65) who both have $750,000. Alex & Kate keep their account at the bank earning 1%. Doug & Ann are invested moderately earning 5%. Assuming both couples are comfortable spending down ¾ of their portfolios and live to age 95 here is what the math tells us:
Alex & Kate can only take out $23,436 annually
Doug & Ann can take out $43,777 annually
Remember that this number is a moving target with your changing financial circumstances throughout retirement. This should be monitored closely to alert you of any required changes. If all goes well, you may even get a raise in retirement!
An important note: the time value of money equation assumes you will make exactly the stated return every year in retirement. Realistically this will most certainly not be the case.