How Long Will Your Money Last?

June 03, 2016

One of the most common questions we receive from clients is how much money can safely be withdrawn from an investment account without eating into principal. Of course, your specific financial needs and goals will impact when and how much you withdraw from your accounts. But in general, if you are in retirement and using your assets to supplement your income, we suggest keeping your annual withdrawals to 5% or less of your account value.

To demonstrate the rationale behind the 5% rule, take the following hypothetical example: The year is 1999 and one of the most challenging stock market decades lie ahead. The dot-com bust, the 9/11 attack, the Enron scandal, the war in Iraq, the financial crisis, two U.S. recessions and a partial government shutdown. Now imagine that you retire that year and immediately start taking regular distributions from a $100,000 account invested in a balanced portfolio. How long will your money last? The result may surprise you. If you kept your distribution rate to 5% (or $5,000 p/year), you could end up essentially maintaining the principal of your account while taking over $85,000 in distributions. What’s more, if you kept your distribution rate to 3% while invested in a balanced portfolio (or $3,000 p/year) in this example, the account balance grew to over $150,000—despite starting at one of the most challenging points in market history.

So if you’re wondering how long your money will last, take a look at the distributions you’ve taken over the last few years. If you’re annual withdrawals have been roughly 5% or less of your account value, then you’re staying within what we would consider a reasonable distribution rate.