Drawdown Percentage

AAA

DEFINITION of 'Drawdown Percentage '

The portion of a retirement account that a retiree withdraws each year. If the drawdown percentage is too high, the retiree will outlive her savings and struggle financially at the end of her life. If the drawdown percentage is too low, the retiree will die with money left over. Many people wish to spend most or all of the money they’ve worked so hard to earn and invest during their lifetimes. Others want to make sure they leave an inheritance for their spouse, children or charities they support.

INVESTOPEDIA EXPLAINS 'Drawdown Percentage '

A common suggestion for the ideal drawdown percentage is 4% of principal annually, adjusted for inflation. This 4% rule is supposed to maximize one’s chances of having enough money to last through to the end of one's life. A drawdown percentage of 4% is based on historical investment performance of a portfolio made up of 50% bonds and 50% stocks, and historical inflation rates. It is expected to ensure that the retiree’s nest egg lasts a minimum of 33 years and a maximum of 50-plus years.

Critics of the 4% drawdown percentage say many people won’t experience 33 years of retirement because they will work beyond age 65 and/or because of poor health, and point out that overall market performance has changed since the rule’s development in 1994. Usually, the best way to calculate the drawdown percentage for your own nest egg is to consult an independent financial planner.

RELATED TERMS
  1. Gold IRA

    Definition of Gold IRA
  2. Pension Risk Transfer

    When a defined benefit pension provider offloads some or all ...
  3. Death Master File (DMF)

    Also known as Social Security Death Index. A list of people whose ...
  4. To Fund

    A type of target-date retirement fund whose asset allocation ...
  5. Through Fund

    A type of target-date retirement fund whose asset allocation ...
  6. Leveraged Benefits

    The use – by a business owner or professional practitioner – ...
Related Articles
  1. Impact Of Continuing To Work In Retirement ...
    Retirement

    Impact Of Continuing To Work In Retirement ...

  2. Guide To 401(k) And IRA Rollovers
    Retirement

    Guide To 401(k) And IRA Rollovers

  3. New Retirement Plan Limits For 2011
    Taxes

    New Retirement Plan Limits For 2011

  4. How Much Social Security Will You Get?
    Retirement

    How Much Social Security Will You Get?

comments powered by Disqus
Hot Definitions
  1. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  2. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  3. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  4. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  5. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
  6. Limit-On-Open Order - LOO

    A type of limit order to buy or sell shares at the market open if the market price meets the limit condition. This type of ...
Trading Center