4 Factors to Finding Your Ideal Retirement Withdrawal Rate | Personal Finance

March 22, 2021

2. Your rate of return

How much you earn each year on your investments will play a big role in how much you can spend. If your accounts earn 10% each year on average and you're taking out 4%, they will still be growing at a rate of about 6% each year. In this scenario, you can probably afford a higher withdrawal rate than if your accounts only earn 5% on average each year.

But the asset allocation model that drives your rate of return shouldn't be based solely on how much you plan on taking from your accounts. Investing in a portfolio that is too aggressive for your investor profile could also be risky. These portfolios may earn more on average but are more volatile. In years when the stock market does very well, they will perform better than other portfolios. But in years where the stock market doesn't do well, they will lose more. While you're working, this may not be a big deal because your accounts have plenty of time and can regain any losses. But in retirement, you don't have time on your side, and losses are intensified by the money that you're taking out. So in a year like 2008, when large-cap stocks were down 37%, a portfolio that is taking out 4% in withdrawals each year will close out 41% lower.