Retirement - The Magic Withdrawal Triangle

Nov 17, 2012: Let us look ahead into the future when we are about to retire. All these years we have toiled hard, made sacrifices and invested diligently to make our nest egg grow. Now it is time to enjoy a new dimension of life. Relaxation! How much should we draw out of our nest egg so that it lasts through our entire retirement?

We are well aware that the stock market is too risky when there is less recovery time on our side. At this juncture of life, our portfolio's asset allocation is more conservative and income oriented. As a result a significant portion of our investments have been astutely shifted from equity to fixed income investments and more liquid instruments. Say a sizable part of our nest egg has been transferred to a money market fund or a similar investing vehicle. Having done all this it is time to give ourselves a break. Ah! All those dream vacations!

Now, the question that has to be addressed is "How much can we withdraw each year?" This step needs some care and strategic planning. Let us assume that our lifestyle requires an annual budget of $70,000. Say we have a million dollars nest egg and our current investments are expected to grow at a very modest 6% annually. How many years will it last?

Well this nifty and handy triangle says that it would still last for 33 years without any need to compromise on our current lifestyle. How does this magic triangle work?
» Let us locate the cell where the % of expected earnings and withdrawal rates meet.
» In the above example, the earnings grow at an assumed rate of 6%.
» So we locate the number 6 on the green column.
» Next we locate the payout or withdrawal percentage on the orange bar at the top. Since $70,000 is 7% of our nest egg worth a million dollars, we go to 7 in the orange Payout bar.
» The intersection of the 7% Payout column and 6% Earnings row is 33.
» This number 33 denotes the period for which our nest egg would last.

The Magic Withdrawal Triangle
The magic triangle assumes that the payout is a fixed amount withdrawn every year-end. In our example $70000 is withdrawn at the end of every year. The payout percentage is fixed with respect to the principal or initial value of the nest egg at the start of the retirement.

What is the significance if we reach a "blank cell"? Well friends, in that case we have struck gold! This is excellent news since it means that our nest egg will be evergreen. In other words it would keep growing perpetually and last forever.

Note that this chart does not factor in personal income taxes or inflation. So we have to take that into account during our retirement planning. We hope that this chart will help our audience find a ball park withdrawal rate that will sustain their current lifestyle during retirement.

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