30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances

Chapter 29. Determine Your Portfolio Withdrawal Rate

"Can we afford to retire?"

That's a common question, and it's one that a subscriber to my newsletter, Morningstar PracticalFinance, posed to me in a request for a Portfolio Makeover in mid-2009.

A former community college administrator, this 59-year-old reader had already retired, but her husband, 58, was still working in a position in state government. His commute took roughly three hours a day, cutting into this couple's leisure time and prompting them to consider whether full-time retirement was a possibility for both of them.

They had diligently saved and lived frugally; they also would be able to draw on pensions in retirement. That helps explain why they were able to consider retiring at a much younger age than most of us can contemplate. However, their retirement portfolio had taken a big hit during the bear market, and this couple had also invested in two real estate properties in 2006, near the peak of the bubble. They had hoped to use one of the properties as a vacation home and sell the other to help fund retirement, but the tanking markets for property had called that plan into question.

Determining the feasibility of an early retirement for this couple depended on a combination of factors, some of them knowable, some of them not. In the (at least somewhat) knowable column was how much they intended to spend in retirement as well as the income they could expect from sources other than their investment and real estate portfolios—in ...