When it comes to retirement income planning, it’s important to find a withdrawal rate that provides income for as long as it’s needed.

Your retirement lifestyle will depend not only on your assets and investment choices, but also on how quickly you draw down your retirement portfolio. But establishing an appropriate withdrawal rate presents many challenges and requires analysis of many aspects of your retirement income plan.

It’s becoming more common for retirement to last 30 years or more, and a lot can happen during that time. Drawing too heavily on your investment portfolio, especially in the early years, could mean running out of money too soon. Take too little, and you might needlessly deny yourself the ability to retire comfortably. You want to find a rate of withdrawal that gives you the best chance to maximize income over your entire retirement period.

In retirement income planning, it’s important to ensure your withdrawal rate is sustainable, and represents the maximum percentage that can be withdrawn from an investment portfolio each year to provide income that can, with reasonable certainty, be available for as long as it’s needed.

Considerations
A number of factors need to be taken into consideration as you develop your withdrawal strategy:

As with most components of retirement income planning, each of these factors affects the others. For example, projecting a longer lifespan will increase your need to reduce your withdrawals, boost your returns, or both, in order to make your withdrawal rate sustainable. Of course, if you set too high a withdrawal rate during the early retirement years, you may face greater uncertainty about whether you will outlive your savings. Ultimately, your individual comfort level with your plan’s probability of success will be the deciding factor.

Types of Withdrawal Rates
The process of determining an appropriate withdrawal rate continues to evolve. As baby boomers retire and individual savings increasingly represent a larger share of retirement income, more research is being done on how best to calculate withdrawal rates. Needless to say, there are a number of approaches to establishing a sustainable withdrawal rate, depending on needs and circumstances.

Income-Only or Income-and-Principal
Many people plan to withdraw only the income from their portfolios, intending not to touch the principal unless absolutely necessary. This is certainly a valid strategy, and clearly enhances a portfolio’s sustainability. However, for most people, this approach requires a substantial initial amount. If your portfolio can’t produce enough income to meet necessary expenses, an income-only strategy could mean that you might needlessly deprive yourself of enjoying your retirement years as much as you could have done.

A sustainable withdrawal rate can balance the need for both immediate and future income by relying heavily on the portfolio’s earnings during the early years of retirement, and gradually increasing use of the principal over time in order to preserve the portfolio’s earning power for as long as possible.

Planning to use both income and principal requires careful attention. In establishing your strategy, you should consider whether you want to use up all of your retirement savings yourself or plan to leave money to heirs. If you want to ensure that you leave an estate, you will need to adjust your withdrawal rate accordingly.

Your decision about income versus income-plus-principal should balance the need for your portfolio to earn a return high enough to sustain withdrawals with the need for immediate income.

Once you’ve established an initial withdrawal rate, you probably should revisit it from time to time to see whether your initial assumptions about rates of return, lifespan, inflation and expenses are still accurate, and whether your strategy needs to be updated. iBi

Marty Roth is a certified financial planner and director with McGladrey Wealth Management LLC in Peoria. Original article prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013.