ETF withdrawal plan: how long will my portfolio last?

What is a withdrawal plan?

A withdrawal plan is the reverse of a savings plan. Instead of buying ETF shares every month, you sell some every month or year and use the money to live on. The rest stays invested and can keep growing. How long the money lasts depends on four things: the starting capital, the amount you withdraw, the return during the payout years, and whether your withdrawals rise over time.

Fixed amount or fixed percentage

There are two basic approaches, and they behave very differently.

• Fixed amount: you withdraw the same sum each month, often raised once a year for inflation. Your income is predictable, but the portfolio can run out if returns are weak.
• Fixed percentage: you withdraw a set share of the current portfolio value, for example 4% a year. The portfolio never fully runs out, but your income rises and falls with the markets.

The 4% rule – where it comes from

The 4% rule goes back to financial planner William Bengen. In 1994 he looked at historical US market data and asked which initial withdrawal rate, raised with inflation every year, would have lasted at least 30 years in every period he studied. His answer was about 4% of the starting portfolio.

In 1998, three professors at Trinity University in Texas published a related study – often called the Trinity study – that calculated success rates for different withdrawal rates and mixes of stocks and bonds over periods of up to 30 years.

In practice: with $500,000, the rule suggests $20,000 in the first year, about $1,667 a month. In later years you adjust that amount for inflation instead of recalculating 4% of the current value. Keep in mind that the rule is based on past US data, mixed stock and bond portfolios and a horizon of about 30 years. It is a rule of thumb, not a guarantee, and fees and taxes are not part of it.

Worked example: how long does $300,000 last?

The following numbers are purely hypothetical. They assume a starting capital of $300,000, withdrawals at the start of each month, a constant return credited monthly, an optional increase of the withdrawal once a year, and no fees or taxes.

What the example shows

Without any return, $300,000 simply lasts 250 months at $1,200. A constant 4% return more than doubles that. Raising the withdrawal by 2% a year to keep pace with inflation costs about 17 years compared with a flat withdrawal. And going from $1,200 to $1,500 a month shortens the plan by almost seven years.

A useful reference point is the amount you could take out without shrinking the capital much: roughly the return on it. At 4% a year on $300,000, that is about $1,000 a month.

Sequence-of-returns risk

Real markets don't deliver a constant return. And when you are withdrawing money, the order of good and bad years matters. Losses early in retirement hit a larger share of your capital, and the shares you sell at low prices are gone for the recovery.

A hypothetical example: $300,000, $15,000 withdrawn at the start of each year, and five yearly returns of −20%, −10%, +5%, +15% and +20%. Without withdrawals, the order would make no difference. With withdrawals, the portfolio ends at about $217,300 if the bad years come first and about $250,200 if they come last – a gap of more than $32,000 from the same returns.

Inflation

A fixed withdrawal loses purchasing power every year. At 2% inflation, $1,200 today buys only what about $808 buys now after 20 years, and prices roughly double in 35 years. That is why many plans raise the withdrawal every year – and why that increase has such a big effect on how long the money lasts.

Taxes on withdrawals in Germany

If you live in Germany, the following applies in general terms: when you sell ETF shares, only the gain is taxed, not the whole amount you withdraw. Capital gains are subject to a flat 25% tax plus solidarity surcharge and, if applicable, church tax. Equity ETFs benefit from a partial exemption of 30% of the gain, and the saver's allowance of €1,000 per person per year (€2,000 for jointly assessed couples) stays tax-free. The exact amount depends on your purchase prices and personal situation; for a binding answer, ask a tax advisor. Rules in other countries differ.

Plan your payout with Owlvest

The payout plan in Owlvest is part of Owlvest Premium. You enter your capital, the monthly withdrawal, the expected return during the payout and a yearly increase, and the app shows how long your capital lasts, until which month, how much you withdraw in total and the perpetual withdrawal – roughly what the returns pay out. Like the example above, it takes withdrawals at the start of each month and does not include taxes. From the savings calculator, you can carry your final value straight into the payout plan.

General information, not investment or tax advice.