If your retirement plans have begun to loom larger on the horizon, slowly transitioning from long-range hopes or ideals to your next five-year plan, you may be battling equal parts excitement and anxiety. Even if you've been a prodigious saver over your working life, switching from saving mode to withdrawal mode can be tough, and many new retirees find themselves worried about spending down their nest egg too quickly and ending up back in the job-hunting market. What withdrawal rate should you use for your own retirement calculations, and how can you know whether you're withdrawing too much (or not enough)? Read on to learn more about some of the most common schools of thought when it comes to retirement withdrawals.
What's the recommended approach to withdrawing funds in retirement?
Many financial advisers use four percent of total assets as the target maximum withdrawal rate -- this is generally seen as the amount that can be siphoned from an investment account each year without causing a loss of principal. Put another way, if you save $1 million for retirement, you should be able to withdraw up to $40,000 per year (under relatively normal market conditions) while still keeping your original $1 million intact.
However, this can vary based on stock returns, asset allocation, and a host of other factors, so the calculations shouldn't end there. In addition, some experts have pointed to the four-percent figure as being less appropriate after the Great Recession, cautioning retirees to be a bit more conservative and perhaps consider withdrawing a maximum of only two to three percent per year instead. This conservative approach is more likely to maintain your principal savings and provide you with a nest egg to pass down to heirs or use for long-term care once you're no longer able to live independently.
When may a withdrawal rate in excess of four percent be appropriate?
There are some situations in which being more aggressive when it comes to drawing down your nest egg may work to your favor.
If you're expecting a sizable pension, Social Security payment, or inheritance, you'll want to factor this income into your retirement budget. Often, you may find your withdrawal rate drops significantly once you've begun bringing in these alternative sources of income, allowing your invested balance to continue to grow well after you've retired.
In other cases, you may want to dip into your principal to avoid leaving an inheritance, whether to avoid infighting among your children or other heirs or simply to take advantage of your hard-earned money during your lifetime rather than passing it along to someone else. As long as you have enough of a guaranteed stream of income not to need your nest egg later in your retirement years, you should be able to spend with impunity.
(Purchasing an annuity fairly early in retirement may be a good way to provide you with this guaranteed monthly income while giving you the freedom to spend down your other funds more quickly.)
For more information on planning for your retirement, check out a company like Wealth Mechanix.
When my card was declined at the grocery store a few months ago, I realized my financial situation had hit rock bottom. Instead of ignoring the problem, I decided to meet with a financial counselor to see what I could do to make things better. I talked with him about how to handle unplanned expenses and how to budget for my day-to-day life. It was incredible to learn more about money, and now I can proudly say I am living within my means. I decided to make this blog for anyone that struggles with financial planning so that you can turn things around.