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3 Approaches to Setting a Withdrawal Rate

Christine Benz

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Christine Benz: I'm Christine Benz for Morningstar.com.

One of the key ways to make your portfolio last throughout retirement is to give care to how much you withdraw from your portfolio. It's a tough question, and the right answer will only be apparent in hindsight.

There are a few key ways to approach it though. One is to withdraw a fixed percentage of your portfolio per year, regardless of your balance. That means you'll never run out of money, but it can lead your cash flows to be buffeted around quite a bit.

Another approach is to target a specific dollar amount per year, then inflation-adjust that amount as the years go by. That's the strategy that the 4% rule is based on. The plus is that your income stream will be smooth, but not reducing withdrawals in down markets could jeopardize your portfolio's longevity.

Finally, you can think about a hybrid strategy, where you try to stay close to a certain annual percentage withdrawal but give yourself some leeway to take more in strong markets and less in weak ones.

Setting a withdrawal rate is one of the biggest decisions you'll make in retirement, so this is an area to get some help. And no matter what, be sure to revisit your withdrawal rate on an ongoing basis.

Thanks for watching; I'm Christine Benz for Morningstar.com.