Morningstar Solutions
Morningstar Solutions
Determine Your Withdrawal Rate
Slide 2: Determine Your Withdrawal Rate
Figuring out how much money you will need in retirement and at what rate to withdraw it from your portfolio can be tricky. There isn't a one-size-fits-all solution, but there is a basic approach that you can tweak to fit your personal situation.
Slide 3: Determine Your Withdrawal Rate

To get started, download Morningstar's Retirement Income Worksheet.

Look for the asset allocation that is closest to your own. If you're not sure what your allocation is, you can find it by entering your portfolio holdings into Morningstar's Instant X-Ray tool.

Slide 4: Determine Your Withdrawal Rate

To the right of the appropriate allocation, select the number of years you expect to be retired. This is of course somewhat unpredictable, but you can get an estimate by looking at life expectancy tables.

If you are married, go by the female partner's life expectancy because it is longer. Adjust the estimate upward if you are healthy and longevity runs in your family, and downward if you think health might be an issue.

Slide 5: Determine Your Withdrawal Rate
Determine how much peace of mind you need that you will not run out of money. If you want a high degree of certainty that your money will last through retirement, circle 85% or 95% on the worksheet. If you are more willing to tolerate a shortfall in exchange for more spending power, circle 50%.
Slide 6: Determine Your Withdrawal Rate

Find the intersection of your expected number of retirement years and risk level to see your suggested withdrawal rate. For example, the withdrawal rate would be 4% for someone with a balanced portfolio who expects 30 years of retirement and wants to be very certain his or her money will last. The withdrawal rate is the percentage of your portfolio you can tap each year to make your money last through retirement.

These rates assume your withdrawals will step up annually to keep pace with inflation. They also assume you will use up all of your assets in retirement, so you will need to adjust your withdrawals downward if you want to leave assets to your heirs.

Slide 7: Determine Your Withdrawal Rate

Calculate how much money you will have annually. Page two of the worksheet can help you. First, multiply your withdrawal percentage by your total invested assets to see how much you can withdraw each year. Next, tally up any other sources of income you expect to have during retirement--including earnings from part time jobs, Social Security benefits, pensions, and annuity income--and add it to your yearly amount. These calculators can help you estimate how much you will get from Social Security.

Slide 8: Determine Your Withdrawal Rate
Now that you know how much money you can expect annually, ask yourself if it is enough to sustain you. If the amount won't cut it, consider options to increase the chance of your money lasting through retirement: work a few extra years before retiring, hold a part-time job during retirement, increase your savings rate, or make your portfolio more aggressive (but realize doing so could also make it more volatile).
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Determine Your Withdrawal Rate
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