How much can I safely withdraw from my nestegg?
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How much can you withdraw from your nest egg when you are in retirement? In the field of mathematics is a statistical method called Monte Carlo Simulation (named after the gambling city in Europe). Monte Carlo simulation involves completing calculations for many probable scenarios to help in decision-making. In the example of withdrawing money out of a retirement account the key parameters are the percent of the portfolio withdrawn each year and mix of stocks and bonds in the portfolio. Through calculation of over a hundred of scenarios using historical stock and bond returns, the success rate of your retirement scenario can be evaluated.
A web site that explains this concept in more detail and provides a calculator (Called FIRECalc) to predict how long you can survive off of your nest egg is: http://www.fireseeker.com/ I recommend that you run the calculator multiple times to see how your annual spending, nest egg size, percentage of portfolio in stock, and expense ratios impact how long your money will last.
Using the FIREcalc calculator and these assumptions:
1) Portfolio of 50% stocks and bonds
2) 30 years in retirement
I found the following results:
| Withdrawal |
Probability of |
Expected life |
| 4% |
95% |
perpetual |
| 5% |
53% |
32 years |
| 6% |
35% |
25 years |
| 7% |
20% |
20 years |
| 8% |
10% |
17 years |
| 9% |
2% |
14 years |
| 10% |
0% |
12 years |
The table above reveals that the life of the portfolio increases as the withdrawal rate decreases. Of course this in not surprising, but it helps to see that a 10% withdrawal rate will last about 12 years, a 7% withdrawal rate will last 20 years, and a 4% to 5% withdrawal rate will last 30 years or longer.These calculations are assumed a historical rate of inflation and a balanced portfolio of 50% stocks and 50% bonds. In practical terms this means that every $100,000 in retirement savings, provides an annual income of $4,000. Conversely if you desire an annual income of $80,000 then a $2,000,000 portfolio is required. The following table shows the relationship between nest egg size and withdrawal annual income.
| Nest Egg |
4% withdrawal rate |
5% withdrawal rate |
| $100,000 |
$4,000 |
$8,000 |
| $200,000 |
$8,000 |
$10,000 |
| $500,000 |
$20,000 |
$25,000 |
| $1,000,000 |
$40,000 |
$50,000 |
| $2,000,000 |
$80,000 |
$100,000 |
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