Nearing Retirement

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How much can I withdraw in retirement?

The amount you can withdraw from your investments each month in retirement will be based on how much you've saved, your asset allocation, how long you expect to spend in retirement, and which withdrawal method you plan to use. In general, Vanguard suggests making withdrawals at rates no greater than 3% to 5% at the outset of your retirement, depending on your withdrawal method.

The following interactive example can help give you an idea of how much money you may be able to withdraw each month from your investments. The results are based on projections from the Vanguard Capital Markets Model® as of December 31, 2012, and can't be used to forecast future returns or withdrawals. The example shows you how much money you could have withdrawn from the portfolios during the time the returns were calculated using the dollar-adjusted withdrawal method.

If you're not sure how many years you should expect to spend in retirement, see Plan for a long retirement. If you're not sure how much money you'll need each month in retirement, create a realistic budget using our retirement expenses and retirement income worksheets.

Portfolio balance
at retirement
 Portfolio balance
at retirement
$ ($1-$1 billion)
Asset allocation
Time spent in retirement
years
Initial withdrawal rate 4.5 %
Initial monthly withdrawal $ 833

About this example:

IMPORTANT: The estimated withdrawal rate assumes an 85% chance that the portfolio won't run out of money before the end of your chosen investment horizon. The projections or other information generated by this tool are hypothetical, don't reflect actual investment results, and aren't guarantees of future results. Based on your input, results may vary with each use and over time.

Detailed assumptions used by this tool

When determining the value of your investment portfolio, don't include assets slated for large, planned expenditures, such as a new car or a wedding. Also, you may decide not to spend your entire investment portfolio—you may want to keep a "minimum balance" as a cushion for unforeseen expenses or to pass on to your heirs.

Maintaining a minimum balance

Virtually everyone has a need for a cushion against unforeseen expenses. Such expenses might include major medical expenses not covered by insurance, major home or car repairs, or sudden expenses faced by one spouse should the other die or become incapacitated. If you're fortunate enough not to need this cushion during your lifetime, you can pass the money on to your heirs.

Setting a minimum balance in your portfolio to cover these expenses allows you to comfortably spend the rest of your portfolio over the course of your retirement knowing that you have a reserve. But retirees should understand that there's a trade-off: The more income you want to spend, the more you need to lower your expectations about preserving wealth, and vice versa.

When determining the spending rate for your own portfolio, keep in mind how much of a minimum balance you want to maintain. Choose a spending rate that will allow your portfolio to remain above that level throughout retirement.

NOTES

Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Detailed assumptions used by this tool

Spending and inflation. The tool assumes you will increase the dollar amount of withdrawals you make over time to match the rate of inflation. In other words, rather than assuming you will simply withdraw a constant dollar amount in all years, the tool assumes you will keep your total purchasing power constant over time by increasing your dollar amount of spending each year at the rate of consumer price inflation.

Asset allocation. The tool assumes you will maintain a constant asset allocation over your entire planning horizon by rebalancing your portfolio at the end of each year. (The tool does not, however, model the tax consequences or other costs of rebalancing the portfolio.) The terms conservative, moderate, and aggressive refer to a portfolio's asset allocation—that is, its mix of different asset types. For the purposes of the illustration, a conservative asset allocation is considered to be 20% stocks/80% bonds; a moderate asset allocation is 50% stocks/50% bonds; and an aggressive asset allocation is 80% stocks/20% bonds.

Return assumption. The tool uses forward-looking expectations for the U.S. and international capital markets generated by the Vanguard Capital Markets Model (VCMM). The VCMM is a proprietary financial simulation tool developed and maintained by Vanguard Investment Counseling & Research and the Investment Strategy Group. The VCMM uses a statistical analysis of historical data for interest rates, inflation, and other risk factors for global equities, fixed income, and commodity markets to generate forward-looking distributions of expected long-term returns. The asset return distributions are drawn from 10,000 simulations from the VCMM, reflecting 30 years of forward-looking simulations through December 2012.

The VCMM is grounded in the empirical view that the returns of various asset classes reflect the compensation investors receive for bearing different types of systematic risk (or beta). Using a long span of historical monthly data, the VCMM estimates a dynamic statistical relationship among global risk factors and asset returns. Based on these calculations, the model uses regression-based Monte Carlo simulation methods to project relationships in the future. By explicitly accounting for important initial market conditions when generating its return distributions, the VCMM framework departs fundamentally from more basic Monte Carlo simulation techniques found in certain financial software. Please read the research paper Vanguard Capital Markets Model (Wallick, Aliaga-Díaz, and Davis, 2009) for further details.

Limitations. The tool does not calculate any state and federal taxes that you would owe on your withdrawal, nor does it calculate the required minimum distributions that the IRS mandates you to take from certain tax-deferred investments beginning in the year after the year in which you reach age 70½. In addition, the tool assumes that your asset allocation remains constant throughout retirement and does not become more conservative as you grow older. Outcomes produced by the tool are hypothetical, as the tool does not guarantee outcomes or future results.

More information about this tool
A cash flow analysis that uses a constant annual rate of return can differ significantly from an analysis that uses returns that vary from year to year, even if the average annual returns for both analyses are exactly the same. The interplay among the specific paths of investment returns, inflation, and your withdrawal pattern can have a decided effect on your assets and the sustainability of income. Therefore, it is important to examine your portfolio under a variety of different return and inflation conditions.
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