Ok,
I think that the preliminaries are taken care of. It’s time to get started on the topic at hand. We are first going to discuss the Retirement Income model known as the drawdown, periodic withdrawal, systematic withdrawal, incremental withdrawal, etc. I’m sure that there are other terms for it, and I would be very happy if you commented with any terms that you know it by.
Here is a link to a short video that helps by visually describing a basic Retirement Withdrawal Model and its shortfalls, and of course, shows a retirement calculator in action.
If you don’t see the video, follow this link to the youtube video about a simple retirement planning spreadsheet.
Basically, this option entails drawing an income from a balance of money that you keep invested somewhere. I would expect that usually the withdrawals have a monthly frequency. At any rate, the very important variables involved here that affect your survivability are your withdrawal ratio and the rate of return on the investment.
The withdrawal ratio is the amount you are withdrawing monthly divided by the total balance. And of course, the rate of return depends on the investment that you choose. (I will talk a lot about your investment choice, knowing full and well that you are probably diversified and have a portfolio with a number of investments. Just consider it to be short hand).
By and large, when I was working in retirement finance, I would see clients ready to use the average return reported on their stock mutual fund as indicative of the earnings that they could expect year in and year out.
Of course, the problem is that an average by itself isn’t even half the story. There has to be some consideration of volatility so that you can see your prospects for success if the market tanks, particularly early in the life of the income stream.
Let me know if you find this helpful.