There's no foolproof formula for knowing how much you can spend in retirement
Q. I read with great interest your column about spending in retirement but want to understand completely. If I withdraw $4,000 for every $100,000 invested, and increase that amount by 3 percent each year to offset inflation over a 30-year period, what will happen to my original $100,000? Will it run out? Are you assuming any rate of return on the underlying investment divided 60/40 between stocks and bonds? If I assume a 7 percent rate of return, couldn't I withdraw more than 4 percent each year?
At age 60, my wife and I think we have enough money to retire on, but we don't know how much to withdraw each year.
A. Numerous studies about so-called sustainable withdrawals have sought to determine how much money a retiree can spend safely each year. Generally, these studies assume the retiree will need to increase spending by 3 percent a year to keep up with inflation, and that retirement will last 30 years.
Not all studies - I've seen at least 60 - agree on the withdrawal number, or on the most appropriate asset allocation for the retiree's portfolio. But as a rule of thumb, many financial advisers recommend retirees spend no more than 4 percent of their savings the first year in retirement, based on a portfolio divided 60/40 between stocks and fixed-income.
Typically, these studies employ "Monte Carlo" computer simulations - for fans of the television show "Numb3rs," I'll use the term computational algorithms - to estimate the odds of a portfolio not running out of money. Rather than rely on an expected rate of return, Monte Carlo simulations consider thousands of possible scenarios in bull and bear markets and project a range of possible future returns.
Based on that range, a study may find, for example, that a portfolio with a 4 percent withdrawal rate the first year would have a 90 percent chance of not running out of money in 30 years.
Even fans of Monte Carlo simulations, and not everybody in finance is, acknowledge such a finding would be only an estimate. Because the goal is simply not running out of money, just knowing your chances are 90 percent doesn't tell you how much of your principal you may have at the end. So the answer to your first question is, we don't know.
That's because investment returns are not constant. Even if returns average 7 percent, you may have gains some years and losses in others. When you are withdrawing and not adding to a portfolio, losses early on coupled with withdrawals can wipe out your principal quickly.
Using just paper and pencil, I calculated that if your portfolio returned 7 percent a year every year, you could withdraw 4 percent the first year, increase withdrawals by 3 percent every year, and still end up with more than double your original principal after 30 years.
With a constant 5 percent rate of return, your money would last more than 33 years. Depending on your goals and risk tolerance, a conservative portfolio that can deliver a constant annualized 5 percent return may be all you need.
Humberto Cruz can be reached at AskHumberto@aol.com. 
