It’s probably one of the most important decisions you’ll make when you retire – how much to withdraw annually from your retirement assets. Take out too much every year and you may have to seriously reduce your living standard late in life or even deplete your assets. Take out too little and you may unnecessarily reduce your standard of living.
Several factors need to be considered when calculating your withdrawal rate, including your life expectancy, expected long-term rate of return, expected inflation rate, and how much principal you want remaining at the end of your life. Keep these points in mind:
- Your life expectancy. While it’s easy enough to find out your actuarial life expectancy, life expectancies are only averages. Approximately half the population will live longer than those tables suggest. How long close relatives lived and how healthy you are can help you gauge your life expectancy. Just to be safe, you might want to add five or 10 years to that age.
- Rate of return. Expected rates of return are often derived from historical rates of return and your current investment allocation. Historical rates of return are averages of returns over a period of time. You might want to be more conservative than that, assuming a rate of return lower than long-term averages.
- Expected inflation. While inflation has been relatively tame recently, even inflation of 3% can have a dramatic impact on your money’s purchasing power over a long retirement. For instance, at 3% inflation, $1 is worth 74¢ after 10 years, 55¢ after 20 years, and 41¢ after 30 years.
So what is a reasonable percentage to withdraw on an annual basis? To be conservative, it is typically recommended that you only withdraw modest amounts, especially in the early years of your retirement. A common rule of thumb is to withdraw no more than 4% in your first year of retirement, adjusting that amount of inflation in later years.
Consider these tips when deciding how much to withdraw from your retirement funds:
- Use a modest withdrawal percentage to ensure you don’t deplete you assets. While you should certainly go through the process of determining how much to withdraw based on your unique circumstances, be prepared for modest withdrawal percentages. With a $1,000,000 portfolio, a 4% withdrawal equals $40,000.
- Stocks should remain a significant component of your portfolio after retirement. While the recent stock fluctuations have been difficult to deal with, especially for recent retirees, stocks should still remain a significant component of your portfolio. Always consider your risk tolerance before altering your portfolio.
- Review your calculations every year. This is especially important during your early retirement years. If you’re depleting your assets too rapidly, you can make changes to your portfolio, reduce your expenses, or consider going back to work.
- Work as long as you can. Supporting yourself for a retirement that could span 25 or 30 years requires huge sums of money. Consider working at least a couple of years longer than originally planned. During those years, you can continue to build your retirement assets and delay making withdrawals from those assets. Once you retire, consider working at least part-time to reduce your withdrawals from your retirement assets.
Please call if you’d like help with this decision.
Copyright © Integrated Concepts 2012. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. This newsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.