“How much will I be able to spend from my retirement account each year, once I retire?” is a question everyone should know how to answer. This is an important question because withdrawing too much too quickly can leave a retiree in dire straights.

Whatever amount is taken out of the retirement account should not impede the account’s ability to grow. For example, if the account is earning 7% per annum taking out no more than 5% will allow the account to grow by just about 2% per annum. However, the wise steward may want to take things a little further by ensuring that there is also an inflation buffer.

In the example we used above, the account is being allowed to grow by 2% each year, after withdrawals are made. While the account will continue to grow in nominal terms, inflation can still eat away the value of the investment. Therefore if inflation is running at 3% and the account is returning 7% per annum, no more than 2% should be withdraw in order to preserve the same 2% annual growth rate (3% to cover inflation + 2% withdrawals + 2% for growth =7%).

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