This graph illustrates withdrawal and portfolio growth over 12 months. In this example, the withdrawal rate of -9.3% (blue & orange) exceeds the portfolio growth rate of 7.3% (green). The difference—the 2% (orange) portion of the withdrawal—is an impairment of capital.
Preservation of capital is likely one of your investment objectives if you need your portfolio to fund withdrawals throughout retirement. Large withdrawals will reduce the ability of your portfolio to produce an equal-dollar-value return in future years. Impairing capital over a 12-month basis is not a concern: after all, stock prices can decline over 12 months. However, outsized withdrawals over time should be evaluated against your life expectancy and retirement planning.
For example, withdrawals from a RRIF, a typical retirement account, are designed to reduce the value of a portfolio (the capital) over time. At age 72, the government mandates a minimum withdrawal rate of just over 5% of the portfolio value. By age 95, the mandatory minimum withdrawal increases to 20%. Each year, as the withdrawal percentage increases, the value of the portfolio declines. However, the result is a fairly stable dollar value for each year’s withdrawal.