The number one fear retired investors and those nearing retirement age have is outliving their money. Since Americans live longer and investment returns shrink, this can be a real concern.
The traditional adage that it's safe to withdraw four percent of your money each year doesn't address many of today's market and real life factors. That's why it's smart to enlist the aid of an experienced retirement plan advisor who can tailor a plan that addresses specifics rather than generalities.
At Premier, we are often asked what percentage of investments can reasonably be withdrawn annually to avoid running out of money. There really is no one answer to this question. Although there are some rules of thumb, the most appropriate answer is that it depends on several factors. These include your age at retirement, your life expectancy, your financial needs, your asset allocation, the expected rate of return on your investments and the expenses associated with your investment accounts. Finally, you need to factor in anticipated inflation.
The following table shows how the amount of withdrawal and various portfolio allocations can affect the chance of meeting income needs over a 25-year retirement. It assumes that a person retires at year zero and withdraws an inflation-adjusted percentage of the initial portfolio value each year beginning in year one. Annual investment expenses can vary but were estimated at .83 percent for stock mutual funds and .64 percent for bond mutual funds for this study.
One limitation of this simulation model is that it assumes a constant inflation-adjusted withdrawal rate, which may not reflect actual retirement income needs. Medical bills, the death of one spouse or the needs of your family can wreak havoc with this constant. The purpose of this illustration is simply to provide reasonable guidelines. The percentages in the shaded section represent probability percentages. A high probability indicates an investor is more likely to meet income needs in retirement, while a low probability indicates an investor is less likely to do so and may face a shortfall. For example, if an investor has an allocation (at the bottom) of 75 percent bonds and 25 percent stocks, and withdraws at a rate of six percent per year an inflation-adjusted withdrawal amount, there is only a 31 percent probability that the investor would be able to meet their income needs over a 25 year period.
The Importance of Comprehensive Financial Planning
Although there is no fail-safe method to ensure that your money will last for your entire retirement, there are several things you can do to increase the probability of that happening. For example, we suggest:
1. Don't be afraid of (a little) risk. Although the traditional wisdom is to reduce risk to almost zero as you reach retirement age, today's meager rates of return have made that course of action less effective. Though an all-bond, all-CD portfolio is safe, it may not get you where you want to be in 25 years.
2. Delay withdrawals (if possible). Just because you've retired, doesn't necessarily mean that you have to begin withdrawing your retirement money. The federal government doesn't make you withdraw from your IRA or 401(k) account until age 70 1/2. If you don't need the money to meet your monthly expenses, let it continue to grow.
3. Reevaluate your expenses. Another way to help make your money last is to rid your budget of expenses that don't make sense anymore. Do you really need that much house or those two cars? Every dollar you save is money that will help support you in future years.
Of course, the true reasonable withdrawal rate will be unique to your situation. We would encourage you to schedule a time to meet with a caring and competent CFP ® to discuss your personal withdrawal rate and how you can continue to enjoy your lifestyle for the rest of your lifetime.