Retirement means different things to each of us. As you consider your vision for retirement, there are three key numbers to keep in mind; you’ll want to discuss them with your financial adviser if you have one:
Your Withdrawal Rate
This could be your most important retirement number. Your withdrawal rate is the amount you will be taking out of your investment portfolio each year.
Nothing has a bigger impact on your retirement strategy than this number, since it can help determine how sustainable your retirement strategy will be. If you choose a number that’s too high, you may run out of money; if the number is too low, it could mean you are being unnecessarily frugal and not living the life you want.
So what withdrawal rate makes sense for you? The answer is: it depends.
As you consider what makes sense for you, start with these questions: How many years will you spend in retirement? Can you be flexible with your withdrawals and not automatically increase your spending each year if you don’t need to? Can you cut back in years of negative investment performance?
For example, we believe a 4% withdrawal rate may be a good starting point, but this assumes a 25-year retirement and the ability to be flexible with your spending if needed. In reality, your personal withdrawal rate will probably differ based on a number of different variables such as your age, how long you expect retirement to last, your asset allocation and your spending habits, among other things.
Additionally, this rate isn’t something you set and forget — it should be reviewed each year.
The more years you plan on spending in retirement and the less expense-flexibility you have, the more conservative your withdrawal rate should be. This leads us to the second number: