How much annual income can you withdraw from your retirement savings while still making sure you have enough money to fund your remaining years of retirement? This is a question often asked by retirees and those approaching retirement.

What is a withdrawal rate?

A withdrawal rate is simply the percent of the portfolio an investor withdraws each year in retirement. For example, an individual who has accumulated a portfolio worth $1 million with a withdrawal rate of 4% would withdraw $40,000 of income per year. However, in retirement income planning, what’s important is not just your withdrawal rate but your sustainable withdrawal rate. A sustainable withdrawal rate can be defined as the rate that represents the percentage that can be withdrawn from an investment portfolio each year to provide income, with reasonable certainty, that the income provided can be sustained for a specific number of years. For a withdrawal rate to be sustainable, it must also be able to keep up with inflation.

Taking the previous example a step farther, an individual who has accumulated a portfolio worth $1 million, with an initial withdrawal rate of 4% adjusted annually at 3%  for inflation, would withdraw $40,000 of income the first year of retirement, $41,200 the second (i.e., $40,000 increased by 3%), $42,436 the third year and so on.

One of the most famous studies on withdrawal rates was developed in 1994 by a San Diego financial planner and graduate of MIT’s aeronautical-engineering program named William Bengen. Bengen back-tested the effect of various withdrawal rates on five different combinations of stocks and bonds over a 30-year rolling period since 1926.

The results of Bengens’ study demonstrated that that a diversified portfolio of 50% stocks and 50%  bonds with a 3% initial withdrawal rate lasted for at least 50 years in every case. Increase the initial withdrawal rate to 5%, and the portfolio had a 67% chance of lasting 30 years before running out of money. A diversified portfolio of stocks and bonds with an initial 4% withdrawal rate adjusted annually for inflation never ran out of money during any 30-year period. Not only did it ever never run out of money, but in most cases, it actually ended up with more money than with which it started:

  • 96% of the time, the portfolio ended up with more money than its original principal.
  • More than 50% of the time, the portfolio ended up with three times more money than it started with.
  • More than 67% of the time, the portfolio ended up with five times more money than its original principal.
  • Less than 1& of the time, the portfolio ended up with less money than it started with.

With bond yields currently lower than their historical long term average of 3.4%, some advisers and annuity sales representatives are touting their “It’s different this time annuity sales pitch” that a 4% withdrawal rate is obsolete and should be reduced to 2.5%. This lower withdrawal rate would reduce a retiree’s annual income by 38%.

While it is true that bond yields are currently below their long-term historical average, this is not this first time this has happened. From 1926 to 1955, the 10-year Treasury Bonds yield never reached 3%; its average yield during those 30 years was 2.%. And in every 30-year period starting and ending during these years, (i.e., Jan 1, 1925, to Dec. 31, 1954, or Jan. 1, 1926, to Dec. 31, 1955, etc,), a diversified portfolio of stocks and bonds with a 4% withdrawal rate never ran out of money.

Although past performance does not guarantee future results, comparing various withdrawal rates and portfolios based on the past can help prepare you to make more informed investment decisions about your future years in retirement.

And the one thing we do know about the past is that a properly diversified portfolio with a 4% withdrawal rate has held up during 30-year periods with above-average stock valuations, below-average bond yields, double-digit inflation, stagflation (high inflation and high unemployment), 11 bear markets and every other financial calamity the U.S. has been through since the Great Depression of 1929, when the stock market lost 86% of its value.

Martin Krikorian, is President of Capital Wealth Management, a “Fee-Only” registered investment adviser located at 9 Billerica Road, Chelmsford. He is the author of the investment books, “10 Chapters to Having a Successful Investment Portfolio” and the “7 Steps to Becoming a Better Investor.” Martin can be reached at (978) 244-9254. Capital Wealth Managements website;, or via email at,