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Living Off Your Retirement Savings |
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The working community typically receives an overdose of information on how to open individual retirement accounts (IRAs) and how to plan for retirement. But a couple of awareness seminars and many financial pep talks later, some of us are yet to understand how to spend our precious savings in retirement. People have doubts over when to take money out of the retirement vehicles, how much to take, the relevant tax issues and when to take Social Security. While withdrawing excessively will erode savings, taking out too little will mean certain sacrifices and a low standard of living.
Sustainability invariably depends on the withdrawal rate. If you really want the best for your portfolio, why not consider withdrawing a fixed percentage of the portfolio annually, instead of starting with one percentage and adapting as you go along? If you start increasing the withdrawal percentage parallel to the inflation rate each year, the account is going to suffer over the long term. However, if you ignore inflation and the beaten markets and stick to your track, the odds of success will be so much greater.
Some retirement planners recommend a conservative 3.5 percent withdrawal rate. Whether one who has carefully and diligently saved $ 1 million will be happy to withdraw only $ 35,000 a year is debatable but this is definitely a safe way to go, unless you have other assets or annuities. Studies conducted in the early 2000’s have shown that withdrawal rates over 5 percent can turn out to be detrimental for withdrawal periods longer than 15 years.
If the stock market sees a bull run, perhaps the withdrawal rate can be increased up to about 6-7 percent per annum. For example, a $ 1 million saving that earns 3.7 percent annually will sustain for over 25 years at a withdrawal rate of 6 percent. And yet, as more people live over 80 years of age nowadays, the risk of outliving your savings remains.
Let’s say that a portfolio can handle an annual withdrawal rate of 5-6 percent. Retirees can still gain much by being financially flexible. Even if a reduction is necessary, there won’t be many sacrifices or drastic changes to the lifestyle. Staying debt-free is crucial under such circumstances, because you can easily cut down on expenses.
Naturally, there is no single fit for everyone. Some prefer to withdraw aggressively because they don’t have any beneficiaries or future generations to nurture. Retirees with a low claim to Social Security may prefer to be a little more careful with their spending and withdrawing.
Finally, there’s the golden rule to withdrawing from your retirement savings: always take from your winning investments and not the losing ones. |
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