Making your savings last through retirement
A good starting point
Here's a method of withdrawing from your accounts that will generally give you a good chance at making your savings last throughout retirement.
- Withdraw between 3% and 5% of your total savings the first year of retirement.
- Adjust this amount up or down with inflation in future years.
For example, if you retired with a $500,000 portfolio and decided on an initial 4% withdrawal rate, you'd take $20,000 from your portfolio the first year of retirement.
If the rate of inflation was 3% during that year, you'd then increase your withdrawal by $600 ($20,000 x 3%) in your second year of retirement, for a total withdrawal amount of $20,600.
How do I know what percentage to withdraw the first year?
The specific percentage that's "safe" for you depends on your asset mix and how long you need your savings to last.
- With a more aggressive mix and shorter time frame, you might be able to spend more.
- If you have a more conservative mix and a longer time frame, consider spending less.
The way your account is divided among different asset classes, including stock, bond, and short-term or "cash" investments.
An aggressive portfolio is subject to a relatively high level of investment risk. Because risk and reward are related, an aggressive investor can also expect returns that are, on average and over time, higher than those of someone with a moderate or conservative portfolio.
A conservative portfolio is relatively safe from investment risk (although there's no guarantee it won't lose money). Because risk and reward are related, a conservative investor can also expect returns that are, on average and over time, lower than those of someone with a moderate or aggressive portfolio.
Flexibility now gives you flexibility later
A rigid withdrawal plan based on straightforward calculations is easy to understand, but it's unlikely to perfectly align with your actual spending needs in retirement.
You'll probably have additional expenses some years, whether they're planned (a new car) or unplanned (a medical emergency). If you're willing and able to take less than your "allowed" amount some years, it will give you the security of knowing you can safely "overspend" in others.
What if you have a shortfall?
If the annual withdrawals you need to take exceed your safe zone, and you don't think you can be very flexible with your expenses, then you risk running out of money sometime during retirement.
Some ways you can potentially help address this shortfall:
- Work part-time.
- Wait a few more years to retire.
- Buy an annuity to cover your essential expenses.
What do others do?
In 2014, people said they planned to afford retirement by:
- Reducing expenses (75%).
- Working part-time (63%).
- Downsizing their homes (48%).
Source: Ally Bank and Kiplinger's.
Setting up your withdrawals
Once you've figured out how you're going to calculate your yearly withdrawal amounts, you'll need to decide which accounts to take the withdrawals from.
If you have multiple retirement accounts, some with tax advantages and some without, setting up your withdrawals in the most tax-efficient way can be challenging.
All investing is subject to risk, including the possible loss of the money you invest.