Longtime AFM readers will remember the simulated retirement portfolio I put together with exchange-traded funds. I have been tracking the portfolio since 2004, which was the first year that all the exchange-traded funds in the portfolio were available.
As you can see from the graphic below, the withdrawal amount can have a drastic affect on the portfolio’s valueespecially in down years.
I assumed that the retirement account began 2004 with a balance of $1,000,000, invested like so (rebalanced annually to keep the same allocation):
I then ran two hypotheticals based on a 4% and 5% withdrawal rate to show how they impact the portfolio’s value over time (you can click on the graphic to see a larger version):
The portfolio took a pretty big hit in 2008, losing 18% of its value. It has rebounded nicely so far in 2009 but is still well below its value at the end of 2007.
My advice is to stay flexible on your withdrawal rate. If you can afford to take a smaller withdrawal after a down year, then consider doing so.