If you have a retirement plan, and want to check progress, there are many ways to do it.

I am not advocating this as the best way, only way or even a reasonable way... this is something to think about.

When you withdraw money during retirement, there are several forces working "against" you.

1) You are spending money you have saved
2) The markets returns are not predictable
3) inflation can do damage over time even if you account for #1 and #2. Inflation is the "increased cost of goods and serviced". Milk which was once $.99 a gallon now sells for $2.39 a gallon. That's inflation.
4) at some point a person loses their earning power. A person's ability to work and earn more money might be single biggest factor in retiring. If savings tank, and you cannot earn more money, what will you do?

I will use 3 examples of people using different withdraw rates. I will assume all people live 30 years after retiring.

Example A, person has saved $500,000 and withdraws 3% of assets in year 1.

3% of 500k=$15,000.
every year after, this person increases withdraws 3% (to account for inflation).

Assuming a 6% gain each year in retirement, this person would NEVER run out of money. The 3% withdraw rate is quite conservative and each year this person has more money than they had the previous year, except for first two years.

Example B. Person saved $750,000 and withdraws 4.5% of assets. 4.5% of 750k =$33,750. Every year this person increases withdraws 3% (to account for inflation).

Assuming a 6% gain each year. After 30 years, this person has less than half of the $750,000 left. The point being between a withdraw rate of 4.5% and inflation of 3%, the compounding effect will significantly reduce assets.

Example C. Person saved $1 M and withdraws 5% of assets. 5% of $1 M is $50,000. Every year this person increases withdraws 3% to account for inflation.

Assuming a 6% gain each year. In 29 years, this person ran out of money. They spent their entire savings in 29 years.

The risks I am trying to illustrate is what percent can you take out. 4% is usually used as the "planning figure". If you are 30, 20 or even 10 years away, use the 4% number as the target.

There are several things you can do to adjust for withdraws and prevent running out of money in a 30 or 40 year retirement:

1) Only take out the "3% inflation" factor in years market went up (in a down market, keep spending in line with previous year (when market goes down).
2)Purchase an annuity to replace a portion of your "fixed income". The annuity guarantees money for life.
3) Delay SS payments to age 70, to maximaze that benefit, knowing that SS will "never" go away.
4) reduce spending


There are risks with "drawing down" principle, here are risks, not mentioned yet

1) If market drops within first 2-3 years of retirement, this is single biggest risk not mentioned (if market drops 20% in any of above cases, only to "come back in years 5,6,7,8 of retirement, all of situations above would have drastically worse results.

2)High inflation would destroy all of these simulations. I listed example for mild planning, not trying to illustrate what would actually or never happen.

3) Investing to get a 6% return during retirement involves being around 40-60% invested in equities (probably). Getting a 6% return from a conservative investing tool (bonds, money markets, CDs) is not an easy thing to do, and these conservative instruments will lose to inflation most of the time (3% yield from a CD with 4% inflation means you "lost" 1% of money).

One additional point, there is a technique called "Monte Carlo Analysis" which will do most of this for you. Runs through random market patterns, inflation patterns and such to see if "amount", "withdraw rate" and "years to live" last your projected lifetime.