I was recently challenged by an investor couple attempting to determine the amount of annual spending they can make based on their portfolio.  How, they asked, can we make a rational decision when we do not know the future return in investment markets, the future rate of inflation or their life expectancy?

My general rule of thumb has been to take no more than 4 to 5 % of the portfolio per year.  For many of my clients this translates to having an investment portfolio around $2 million in addition to social security in order to maintain the life style they are comfortable with.  A five percent withdrawal rate would be the maximum unless the time horizon is under 20 years.  For purposes of determining life expectancy, I generally use age 95 unless the client suggests otherwise.  This assumes a portfolio with a 50/50 split between stocks and bonds.

Sometimes clients prefer to use a set monthly dollar amount for a withdrawal, such as $7500 per month, and annually adjust this amount as needed to pay expenses.  This disadvantage of this approach is if financial markets decline significantly, we need reduce the monthly amount.

I have recently read an excellent article by Jaconetti and Kinniry that serves as a useful reminder of the factors to consider and how best to balance competing retirement goals.

It is important to annually review your spending strategy and your investment portfolio with your investment advisor.