This article deals with several important retirement questions: “How much money do I need in my investment portfolio at the start of retirement?” and “How much can I safely withdraw from my investment portfolio during the retirement years?”

While it’s not possible to provide a precise answer that applies to everyone’s unique situation, it is possible to provide general guidance.

Let’s start with the first question: “How much money do I need in my investment portfolio at the start of retirement?” This is one aspect of retirement portfolios that is surprisingly straightforward. The amount of your preretirement income that you will be able to replace while in retirement is directly (and mathematically) related to your retirement portfolio account balance, which I translate into a retirement account multiple, or RAM. The connecting tissue between these two variables is your initial withdrawal rate—or the percentage of your retirement account balance that you are withdrawing in the first year of your retirement.

As shown in Table 1, if your preretirement salary was $100,000 and you have accumulated a retirement account balance of $1.2 million, you have a RAM (retirement account multiple) of 12x ($1,200,000 ÷ $100,000). A 4% withdrawal rate in the first year of retirement equals $48,000 (retirement account balance $1.2 million × 0.04). This equals a 48% replacement of your preretirement income of $100,000 coming from your investment portfolio. Understandably, you may have other retirement income from other sources.

Table 1. Final Salary, RAM, Withdrawal Rate and Income Replacement

Various combinations of RAM and withdrawal rates are summarized in Table 2. For example, a RAM of 7x that is paired with a 3% initial withdrawal rate will allow you to receive (in the first year of retirement) 21% of your preretirement annual salary. Or, a RAM of 12x paired with a 4% initial withdrawal rate will allow you to replace 48% of your final working salary (highlighted in yellow in Table 2) in the first year of retirement. A RAM of 15x and 5% withdrawal rate equals 75% income replacement in retirement, and so on.

The figures in Table 2 represent the percentage of preretirement income being replaced in the first year of retirement. Numbers in red represent income replacement ratios of below 60%. The figures in green represent income replacement of 60% and higher. For many retirees, the replacement ratios in red may not provide adequate retirement income. Red numbers are caused by a RAM that is too low and/or a withdrawal rate that is too small.

Table 2. Income Replacement in Retirement Based on RAM
and Withdrawal Rate

At the moment of retirement, two issues are extremely relevant: your retirement portfolio account balance and the percentage of preretirement income that you are attempting to replace (in full or in part). Table 2 provides guidance regarding the relationship between those two variables. For example, if you are wanting to replace 100% of your final working salary, you will need a retirement account balance at least 15x larger than your final salary. However, you would need to withdraw 7% of your account balance during the first year to meet your income goal. A withdrawal rate of 7% is quite high. Alternatively, if you have a retirement account balance equal to 20x your final salary, you can drop down to a 5% withdrawal rate in your first year of retirement. The lower the withdrawal rate the better—in terms of not outliving your savings.

How Long Will My Retirement Portfolio Last?

All the analysis presented so far only gets you through the first year of retirement. The next question—and it is a big one—pertains to how many years your portfolio will last. To help address that question, I have evaluated several different retirement portfolios over the past 89 years. Only four asset classes have performance data going back to 1926 (large-cap U.S. stocks, small-cap U.S. stocks, U.S. bonds, and U.S. cash).

The first portfolio (see Table 3) is a conservative retirement model that consists of 25% U.S. stocks and 75% fixed income (specifically, 15% large-cap U.S. stocks, 10% small-cap U.S. stocks for the stock portion and 55% bonds and 20% cash for the fixed-income portion). This four-asset portfolio was rebalanced at the end of each year back to the prescribed allocations. The performance of large-cap U.S. stocks was represented by the S&P 500 index, small-cap U.S. stocks by the Ibbotson Small Stock Index from 1926–1978 and the Russell 2000 index from 1979–2014, U.S. bonds by the Ibbotson U.S. Intermediate Government Bond Index from 1926–1975 and the Barclay’s Capital Aggregate Bond Index from 1976–2014, and U.S. cash was represented by 90-day Treasury bills.

Over the 89-year period from January 1, 1926, to December 31, 2014, there were 55 rolling 35-year periods. The 25/75 portfolio was tested under various initial withdrawal rates and cost-of-living adjustments (COLA) to determine how often it was able to last for at least 35 years (simulating the 35-year period between ages 65 and 100 for a retiree).

Table 3. Historical Success Rate of Conservative Risk 25/75 Retirement Model

As shown in Table 3, the 25/75 portfolio had a success rate of 100% assuming a 2% initial withdrawal rate on a 0% cost-of-living adjustment (COLA). Historical “success rate” is defined as the retirement portfolio remaining solvent for at least 35 years. However, as illustrated in Table 2, a 2% initial withdrawal rate only provides an income replacement of 50% if a RAM of 25x is assumed, which is a very bold assumption of RAM. At a more likely RAM of 12x, the income replacement ratio associated with a 2% withdrawal rate is a modest 24% (as calculated by multiplying RAM by the withdrawal rate, or 12 × 0.02). In addition, a 0% COLA means the amount of money withdrawn each year never increased during the 35 years of retirement. Likely a poor assumption.

Under more reasonable assumptions of a 4% initial withdrawal rate and an annual COLA of 3% during the 35-year retirement period, the 25/75 portfolio had a success rate of 93% as shown by the yellow highlighting in Table 3. (If we assume a RAM of 12x, a 4% withdrawal rate allows a retiree to replace 48% of their pre-retirement income). As can be seen, the success rate of a 25/75 portfolio declines dramatically once the initial withdrawal rate reaches 5% or higher and if the COLA is 3% or higher. A success rate of below 90% may not be acceptable for a retiree. (Green percentages indicate success rates of 90% or higher, while red percentages indicate success rates of 89% and below). As stated, “success rate” refers to the ability of the retirement portfolio to last 35 years or longer over the past 89 years.

A word about the cost-of-living adjustment, or COLA. Assuming a starting retirement account balance (or RAM) of $1.2 million and an initial withdrawal rate of 4%, the first year’s withdrawal would be $48,000 (as shown in Table 1). If the selected COLA is 3%, the withdrawal made by the retiree in Year 2 would be $49,440: Year 1 withdrawal multiplied by one plus the COLA ($48,000 × 1.03). The next year the withdrawal would be $50,923, and so on each year with each withdrawal increasing by 3%.

Table 4. Historical Success Rate of Moderate Risk 65/35 Retirement Model

The second retirement portfolio being evaluated is a moderate risk 65% stock/35% fixed income model (specifically 40% large-cap U.S. stocks and 25% small-cap U.S. stocks for the stock portion, and 25% bonds and 10% cash for the fixed-income portion). The success of a 65/35 model as a retirement portfolio was markedly higher than the 25/75 portfolio—particularly when an initial withdrawal rate of 4% or higher and a COLA above 3% were used.

As shown in Table 4, a 65/35 portfolio had a success rate of 98% assuming a 4% initial withdrawal rate and a 3% annual COLA (highlighted in yellow). In other words, a 65% stock/35% fixed income retirement portfolio survived at least 35 years in 54 of the 55 rolling 35-year periods between 1926 and 2014 when 4% initial withdrawal rate and a 3% COLA were used. Even at an initial withdrawal rate of 5% and a COLA of 3%, the 65/35 portfolio had a historical success rate of 91% compared to a success rate of 58% for the 25/75 portfolio.

How Much Can I Safely Withdraw?

In an attempt to address the question of “how much can I safely withdraw each year from my retirement portfolio?,” the information in Table 2 will need to be connected with the information in Tables 3 and 4. This connection is provided in Table 5.

Table 5. Retirement Portfolio Math and Historical Success Rates

Let’s assume that a retiree is attempting to replace about 60% of their preretirement income from their retirement portfolio via annual withdrawals from their retirement portfolio, as highlighted in yellow in Table 5. (If the retiree’s ultimate goal is to replace 100% of their preretirement income, the remaining needed income replacement (40% in this case) will need to come from other retirement income sources such as Social Security, pension(s), rental income, etc.).

A 60% income replacement is not possible if the retiree’s RAM is 5x or 7x. If, however, the retiree has an account balance that is 10x larger than their preretirement income (a RAM of 10x), they can replace 60% of their preretirement income if they employ a 6% withdrawal rate (as calculated by RAM × withdrawal rate = % income replacement).

In Table 5, we see several combinations that can produce a 60% income replacement: a 10x RAM and a 6% withdrawal rate, a 12x RAM and a 5% withdrawal rate, a 15x RAM and a 4% withdrawal rate, and a 20x RAM with a 3% withdrawal rate (all highlighted in yellow).

If a 3% withdrawal rate is used, both portfolios had a historical success rate of 100%. If a 4% withdrawal rate is used, the 25/75 portfolio had success 93% of the time and the 65/35 portfolio 98% of the time. At a 5% withdrawal rate, the 25/75 portfolio lasted at least 35 years in only 58% of the historical 35-year periods, whereas the 65/35 portfolio had success 91% of the time. A 6% withdrawal rate led to a 33% success rate for the 25/75 portfolio and an 87% success rate for the 65/35 portfolio. The critical element in creating a durable retirement portfolio that has a high probability of lasting at least 35 years is an adequate starting balance (or RAM) and as low of a withdrawal rate as possible—plus a retirement account that generates the needed return (i.e., investment performance).

If Table 5 does not include your particular RAM, simply use the formula: RAM × withdrawal rate = % income replacement and then look up the historical success rate in Tables 3 or 4 [based on the withdrawal rate, COLA, and type of portfolio allocation (25/75 or 65/35) that you are assuming].

The green shaded boxes in Table 5 represent income replacement of 60% or higher. The key to using Table 5 is to identify your RAM and the percentage income replacement that it provides at various withdrawal rates.

Finally, check the historical success rate of the withdrawal rate you have selected. In Tables 3 and 4, success rates in green type indicate 90% or higher, while success rates in red type indicate historical success rates below 90%. Low success rates indicate you may need to consider a lower withdrawal rate (which will cause a lower income replacement).

Summary

The four-asset portfolio analyzed in this article represents the four asset classes that can be studied over the past 89 years. It represents a diversified portfolio that includes domestic large-cap stocks, small-cap stocks, bonds, and cash. Today, of course, we can build diversified retirement portfolios that include more than just stocks, bonds and cash.

Other important asset classes to consider include real estate, natural resources, non-U.S. stocks and emerging market stocks, non-U.S. bonds, and inflation-protected bonds. Fortunately, there are many mutual funds and exchange-traded funds (ETFs) that can be assembled to meet the needs of any retiree.

The core concepts outlined in this article should provide a useful template when building your retirement portfolio.

Mathematical Support for Rising Equity Glide Paths

Portfolio Strategies

Discussion

Donald Myers from AZ posted over 10 years ago:

The overall premise of your article is great, namely that the potential retiree should plan ahead and think seriously about how much of a nest egg they need to accumulate. However final salary may not be the best number to work from, I suggest that final net salary may be better or perhaps somewhere between. Several other authors have pointed out the using an RMD schedule in lieu of the 4% plus COLA is much more realistic. Most of the RMD calculators will produce predicted annual payouts for a given initial nestegg, assumed investment rate of return and pertinent age. The beauty of the RMD schedule (even if you are not actually using RMD) is that you won't outlive it. I have been retired almost 18 years although I did have the advantage of quarter time income for another nine years. Although we went through the bubbles of 2000, 2003, the crisis of 2008 and maybe another crisis now, using a 55-40-5 investment ratio (stock funds, bond funds, reits) with very little buying and selling, our net income has gone up nearly every year and the nest egg has gone down very little (using monthly RMD). Once setup with TIAA-CREF and Fidelity it requires little or no maintenance. I think that simplicity is worth quite a bit.

J H Frazier from CO posted over 10 years ago:

Using the actual inflation for each year would yield a more accurate historical analysis. For instance inflation was high during the Carter years, but investment yield was also high. Presenting tables that show 35 year portfolio survival probabilities for different initial withdrawal rates and portfolio characteristics are all that is needed. Whether your RAM is 12X or 5X should not affect your withdrawal rate.

John Ostendorf from TX posted over 10 years ago:

Good article. Soon to be retirees should understand what they are spending. Too much time is spent on "replacement ratios", etc. when the soon to be retiree doesn't even know what he or she is spending. Know that number and work off it rather than some hypothetical.

Robert B. Thompson from MA posted over 10 years ago:

Two items come to mind right off the bat: 1. The absence of International exposure for a retiree. Morningstar is around 20%, notable Boglehead Rick Ferri is at 30% I believe, and Vanguard is at 40%. While many US stocks are "exposed" internationally that still is not the same thing. 2. How should a retiree factor in dividend stocks? If my portfolio yields 3%, shouldn't that skew the success rates higher given that I only need to access 1% of principal? I would appreciate your thoughts. Thank You.

Jack from NC posted over 10 years ago:

Yes, good presentation and all good tweaks as above. Note too that, except for a passing reference, this treatment solves for withdrawal rates as though the investment portfolio needs to provide 100% of the income replacement goal, instead of just the income gap. Also, another tweak or two are needed for investors who want to leave some of the portfolio for survivors. It would be good to see those steps built in to articles.

Matt from CA posted over 10 years ago:

Good article. Here's why: your article points us at the best way to think about risk. For me the risk of a portfolio should be expressed as the rate of success or failure to support the target withdrawal rate with CPI adjustments. With this in mind, is the 65/35 portfolio risk higher than a 90/10 or even a 100% stock portfolio? Doesn't the 65/35 portfolio fail more often than a 90/10 portfolio? PS- I concur with other comments that spending is the baseline to use - not salary/income.

Steve from NJ posted over 10 years ago:

Most retirement articles I read are written with the assumption that the audience does not have a defined benefit and that they must "build-up" a large nest egg prior to retiring. This article is no exception. While I understand that most defined benefit packages have become rare, they still exist. I just retired from the federal government after 38 years and am able to replace about 72 percent of my income through my annual annuity. I would like to see an article written with a biased toward my situation for once. One that provides an analysis of the best ways to replace, for example, the missing 28 percent of income and will last, for argument sake, 25 years.

John from WI posted over 10 years ago:

In addition to Steve above. I would like to see an article on how to structure a retirement which starts prior to when social security pays. How does running 5 years prior to SS effect the overall portfolio. Yes this will get a bit more complex but it is worth the discussion.

Mike from WI posted over 10 years ago:

I second John (from WI)'s suggestion. My wife and I currently find ourselves at that strategic juncture.

Hugh Blanchard from VA posted over 10 years ago:

Who can afford to retire at 57? Good for you, but if you're retiring at 57, you shouldn't need to ask, or perhaps you shouldn't be voluntarily retiring at 57.

Fred Schantz from VA posted over 10 years ago:

If you have a decent pension to cover living costs can you set your Ira withdrawl to as low as a half percent?

Fred Schantz from VA posted over 10 years ago:

If you have a decent pension to cover living costs can you set your Ira withdrawl to as low as a half percent?

Richard Cloutier from GA posted over 10 years ago:

You can be 100% invested in the S&P 500 and be diversified internationally. Approximately, 30% of S&P earnings are from foreign operations.

Michael Alt from FL posted over 10 years ago:

According to Ed Easterling in "probable Outcomes" the success or failure rate of RAM lasting thru retirement is strongly correlated with the timing of Secular Bear and Bull markets. The good news is we are nearer the end of a bear than the begining.

Robert Dailey from CA posted over 10 years ago:

Matt [above] raises a v critical issue in portfolio allocation: the pure or near-pure stock portfolio. Such a portfolio is seldom discussed. It's a solid fact that stocks outperform bonds by a wide margin over the long term. The wide swings of such "pure stock" portfolios is widely decried on the basis of Volatility. But the long-term goal is asset appreciation, not a "soft ride" in wild markets. Additionally, bonds do not confer safety, as all long term holders can assist: they [and I] have been badly hurt by rising interest environments. And low interest environments not only provide negligible income and asset appreciation, but also catastrophe in the inevitable rising interest environment. I personally have a high tolerance for a rough market ride, even at my advanced age. I don't mind the bugaboo of volatility. It's all about long term appreciation.

RLS from MA posted over 10 years ago:

Why not a spreadsheet - where someone puts in their own assumptions - This is based on predicted inflation rate, predicted portfolio gains and withdrawals at the RMD. The table below should expand if copied to a full page format! Year Age Life Expectancy Previous Year End Princiapl Value @ Assumed % Minimum Distribution Remainder Constant Dollars After Inflation Adjustment 70 "$1,000,000" Styarting Principal "$1,000,000" 0 71 27.4 "$1,000,000.00" "$1,060,000.00" "$38,686.13" "$1,021,314" "$38,686" Assumed Earnings in Percent 6 % 1 72 26.5 "$1,021,313.87" "$1,082,592.70" "$40,852.55" "$1,041,740" "$39,663" Assumed Inflation in Percent 3 % 2 73 25.6 "$1,041,740.15" "$1,104,244.55" "$43,134.55" "$1,061,110" "$40,658" 3 74 24.7 "$1,061,110.00" "$1,124,776.60" "$45,537.51" "$1,079,239" "$41,673" 4 75 23.8 "$1,079,239.09" "$1,143,993.43" "$48,066.95" "$1,095,926" "$42,707" 5 76 22.9 "$1,095,926.48" "$1,161,682.07" "$50,728.47" "$1,110,954" "$43,759" 6 77 22 "$1,110,953.60" "$1,177,610.81" "$53,527.76" "$1,124,083" "$44,829" 7 78 21.2 "$1,124,083.05" "$1,191,528.03" "$56,204.15" "$1,135,324" "$45,699" 8 79 20.3 "$1,135,323.88" "$1,203,443.31" "$59,282.92" "$1,144,160" "$46,798" 9 80 19.5 "$1,144,160.39" "$1,212,810.01" "$62,195.39" "$1,150,615" "$47,668" 10 81 18.7 "$1,150,614.63" "$1,219,651.50" "$65,222.01" "$1,154,429" "$48,531" 11 82 17.9 "$1,154,429.50" "$1,223,695.27" "$68,362.86" "$1,155,332" "$49,387" 12 83 17.1 "$1,155,332.41" "$1,224,652.35" "$71,617.10" "$1,153,035" "$50,231" 13 84 16.3 "$1,153,035.25" "$1,222,217.37" "$74,982.66" "$1,147,235" "$51,060" 14 85 15.5 "$1,147,234.71" "$1,216,068.79" "$78,456.05" "$1,137,613" "$51,869" 15 86 14.8 "$1,137,612.74" "$1,205,869.50" "$81,477.67" "$1,124,392" "$52,297" 16 87 14.1 "$1,124,391.83" "$1,191,855.34" "$84,528.75" "$1,107,327" "$52,676" 17 88 13.4 "$1,107,326.60" "$1,173,766.19" "$87,594.49" "$1,086,172" "$52,996" 18 89 12.7 "$1,086,171.70" "$1,151,342.00" "$90,656.85" "$1,060,685" "$53,251" 19 90 12 "$1,060,685.15" "$1,124,326.26" "$93,693.86" "$1,030,632" "$53,432" 20 91 11.4 "$1,030,632.41" "$1,092,470.35" "$95,830.73" "$996,640" "$53,059" 21 92 10.8 "$996,639.62" "$1,056,437.99" "$97,818.33" "$958,620" "$52,582" Payout vs: Age 22 93 10.2 "$958,619.66" "$1,016,136.84" "$99,621.26" "$916,516" "$51,992" 23 94 9.6 "$916,515.58" "$971,506.52" "$101,198.60" "$870,308" "$51,276" 24 95 9.1 "$870,307.92" "$922,526.40" "$101,376.53" "$821,150" "$49,871" 25 96 8.6 "$821,149.87" "$870,418.86" "$101,211.50" "$769,207" "$48,339" 26 97 8.1 "$769,207.37" "$815,359.81" "$100,661.70" "$714,698" "$46,676" 27 98 7.6 "$714,698.10" "$757,579.99" "$99,681.58" "$657,898" "$44,876" 28 99 7.1 "$657,898.41" "$697,372.32" "$98,221.45" "$599,151" "$42,930" 29 100 6.7 "$599,150.86" "$635,099.92" "$94,791.03" "$540,309" "$40,224" 30 101 6.3 "$540,308.88" "$572,727.42" "$90,909.11" "$481,818" "$37,453" 31 102 5.9 "$481,818.30" "$510,727.40" "$86,563.97" "$424,163" "$34,624" 32 103 5.5 "$424,163.43" "$449,613.24" "$81,747.86" "$367,865" "$31,746" 33 104 5.2 "$367,865.38" "$389,937.30" "$74,987.94" "$314,949" "$28,272" 34 105 4.9 "$314,949.36" "$333,846.32" "$68,131.90" "$265,714" "$24,939" 35 106 4.5 "$265,714.42" "$281,657.28" "$62,590.51" "$219,067" "$22,244" 36 107 4.2 "$219,066.78" "$232,210.78" "$55,288.28" "$176,923" "$19,076" 37 108 3.9 "$176,922.50" "$187,537.85" "$48,086.63" "$139,451" "$16,108" 38 109 3.7 "$139,451.22" "$147,818.30" "$39,950.89" "$107,867" "$12,993" 39 110 3.4 "$107,867.41" "$114,339.45" "$33,629.25" "$80,710" "$10,619" 40 111 3.1 "$80,710.20" "$85,552.81" "$27,597.68" "$57,955" "$8,460" 41 112 2.9 "$57,955.13" "$61,432.44" "$21,183.60" "$40,249" "$6,305" 42 113 2.6 "$40,248.84" "$42,663.77" "$16,409.14" "$26,255" "$4,742" Patyout vs. Age Corrected for Inflation 43 114 2.4 "$26,254.63" "$27,829.90" "$11,595.79" "$16,234" "$3,253" 44 115 2.1 "$16,234.11" "$17,208.16" "$8,194.36" "$9,014" "$2,232" 45 116 1.9

Alfred Falcone from NY posted over 10 years ago:

I Think I understand this article but I have a dilemma. My retirement income is stretched over three IRA's with what looks like a 60% stocks to 40% bonds ratio. I am not worried about running out of money in retirement but now that I am 90 years old I am forced to take my full RMD. I have more income than I planned so I am in a high tax stiuation. Can you discuss the role of mandatory RMD in calculating one's distribution using IRS table 509. Why does being 90 years old have to affect my income.?

Alfred Falcone from NY posted over 10 years ago:

I Think I understand this article but I have a dilemma. My retirement income is stretched over three IRA's with what looks like a 60% stocks to 40% bonds ratio. I am not worried about running out of money in retirement but now that I am 90 years old I am forced to take my full RMD. I have more income than I planned so I am in a high tax stiuation. Can you discuss the role of mandatory RMD in calculating one's distribution using IRS table 509. Why does being 90 years old have to affect my income.?

Mike from VA posted over 8 years ago:

Buy ESPlanner, makes figuring this out a lot more accurate and complete.

Robert Mitall from PA posted over 8 years ago:

A simple excel spreadsheet can be created that will answer all the questions about your retirement years. You can test different assumption for inflation, rates of return, and longevity to see if you will have enough money.

Michael Redden from CT posted over 8 years ago:

These type of articles all seem to focus on pre-retirement income and replacing it in retirement. Bur, isn't the true need to replace pre-retirement spending? People need to measure their spending for at least the 2 years prior to retirement and understand what their spending needs will be in retirement. Some people save 10% or 20%or more of their income prior to retirement so that amount of prior savings will not in theory be needed after they retire. I'd like to see more articles address this from a spending perspective vs. an income perspective.

LOUIS A from VA posted over 4 years ago:

I don't see any mathematics. All I see is tables of numbers. Over 20 years ago when I became a member of AAII the Journal provided formulas, and a newsletter provided how-to spreadsheets. Too bad AAII seems to think the current generation of members can't do math. I do my own spreadsheets for financial calculations, including optimizing portfolio allocations, and I'd sure appreciate it if AAII would provide the mathematics for discussed topics (or links to sites with that information).

You need to log in as a registered AAII user before commenting.
Create an account

Email Post Tweet Share Save

FREE REPORT

Top Tech Stocks for 2026

Get your free copy of our special report analyzing the tech stocks most likely to outperform the market.

Download the FREE Report Here:

The Mathematics of Retirement Portfolios

How Long Will My Retirement Portfolio Last?

How Much Can I Safely Withdraw?

Summary

Related

Mathematical Support for Rising Equity Glide Paths

Related

The Importance of Diversification in Retirement Portfolios

Related

A More Dynamic Approach to Retirement Spending

Discussion

FREE REPORT