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.