Ryan discusses the best way to calculate income using a safe withdrawal rate.
Calculating Income with a Safe Withdrawal Rate
One thing that is heavily discussed in the retirement planning industry is what rate is considered to be a “safe” withdrawal rate. Historically, a 3.5-5% rate has been the range that really allows for a safe retirement plan. The younger you are, the less you may want to withdraw from your portfolio versus individuals who are older being more flexible to withdraw higher rates. This is due to the simple fact that older individuals have less time to rely on their portfolio, thus allowing them to withdraw at a higher rate.
Example Calculation for the Common Retiree
An example of a safe withdrawal rate for a common retiree could be using a 4% withdrawal rate. This individual wants $6,000/month in retirement and wants to stay within that safe 4% withdrawal rate. To calculate how this is done, take the monthly amount, $6,000, then multiply it by 12 months to get the annual amount of $72,000. $72,000 multiplied by 4% (.04), gives the amount the individual would need to maintain this lifestyle in retirement. In this case $1,800,000 is how much they would need in their portfolio to withdraw $72,000 annually at a 4% withdrawal rate.