Planning ahead for retirement is a difficult challenge for everyone. It’s often unclear how much we should be saving, and weighing the benefit between money in hand now and money in retirement later is a tough choice for many of us. When you start asking questions about how to invest and where to invest, it gets challenging very fast.
The Simple Dollar offers a robust guide for retirement planning as a whole, but today we’re focusing on one very important element of retirement planning: withdrawal rate.
Withdrawal rate is simply the rate at which you take money out of the account, usually expressed as a percentage of the initial balance. Let’s say, for example, that you have $500,000 in your 401(k) and you choose to withdraw $20,000 a year in retirement. You have a withdrawal rate of 4% or $20,000 divided by $500,000.
Let’s look at some obvious things.