How Much Can You Withdraw From Retirement Assets?

The 78 million Americans who make up the baby boom generation started turning 65 in 2011, and almost 30 million of them have a defined contribution retirement plan such as a 401(k) account, according to the Employee Benefit Research Institute. That means these near-retirees face an important question: How much money can they afford to withdraw from their retirement accounts?

Prior to 2008, financial advisers often encouraged investors to withdraw as much as 7% of their retirement assets each year. The idea was that the return on the retirees’ portfolios could potentially be greater than 7%, so the sizes of the portfolios would stay about the same.

Now it’s a new world, with market volatility the norm. If a new retiree withdrew 7% from a $2 million nest egg each year starting in 2000, he or she would have been left with only $394,634 by the end of last year, according to The Wall Street Journal.

The market’s volatility over the past few years has made it impossible for many new retirees to determine how much they can safely withdraw from their retirement accounts each year without running the risk of depleting their nest eggs before they die.

For example, if you adopted a 5% withdrawal rate in 2007 and your portfolio was decimated in 2008, you’d need to withdraw a much greater percentage in 2009 to obtain the same income.

It’s impossible to devise a one-size-fits-all withdrawal strategy,
but one thing is fairly certain in today’s market environment: Investors can’t just set their asset allocation and forget about it. It’s important to examine your portfolios and adjust your withdrawals regularly, such as annually.