Different ways to respond to the challenge.
Presented by Paul H. Risser
As you retire, there are variables you can’t control; investment performance and fate are certainly toward the top of the list. Your approach to withdrawing and preserving your retirement savings, however, may give you more control over your financial life.
Drawing retirement income without draining your savings is a challenge, and the response to it varies per individual. Today’s retirees will likely need to be more flexible and look at different withdrawal methods and tax and lifestyle factors.
Should you go by the 4% rule? For decades, retirees were cautioned to withdraw no more than 4% of their retirement balances annually (adjusted north for inflation as the years went by). This “rule” still has merit (although sometimes the percentage must be increased out of necessity). T. Rowe Price has estimated that someone retiring with a typical 60%/40% stock/bond ratio in their portfolio has just a 13% chance of depleting retirement assets across 30 years if he or she abides by the 4% rule. A 7% initial withdrawal rate invites an 81% chance of outliving your retirement assets in 30 years.1
That sounds like a pretty good argument for the 4% rule in itself. However, while the 4% rule regulates your withdrawals, it doesn’t regulate portfolio performance. If the markets don’t do well, your portfolio may earn less than 4%, and if your investments repeatedly can’t make back the equivalent of what you withdraw, you will risk depleting your nest egg over time.
Or perhaps the portfolio percentage method? Some retirees elect to withdraw X% of their portfolio in a year, adjusting the percentage based on how well or poorly their investments perform. As this can produce greatly varying annual income even with responsive adjustments, some retirees take a second step and set upper and lower limits on the dollar amount they withdraw annually. This approach is more flexible than the 4% rule, and in theory you will never outlive your money.
Or maybe the spending floor approach? That’s another approach that has its fans. You estimate the amount of money you will need to spend in a year and then arrange your portfolio to generate it. This implies a laddered income strategy, with the portfolio heavily weighted towards bonds and away from stocks. This is a more conservative approach than the two methods above: with a low equity allocation in your portfolio, only a minority of those assets are exposed to stock market volatility, and yet they can still capture some upside with a foot in the market.
Attention has to be paid to tax efficiency. Many people have amassed sizable retirement savings, yet give little thought as to the order of their withdrawals. Generally speaking, there is wisdom in taking money out of taxable accounts first, then tax-deferred accounts and lastly tax-exempt accounts. This withdrawal order gives the assets in the tax-deferred and tax-exempt accounts some additional time to grow. A smartly conceived withdrawal sequence may help your retirement savings to last several years longer than they would in its absence.2
Keeping healthy might help you save more in two ways. Increasingly, people want to work until age 70, or longer. Many assume they can, but their assumption may be flawed. The 2012 Retirement Confidence Survey from the Employee Benefit Research Institute found that 50% of current retirees had left the workforce earlier than they planned, with personal or spousal health concerns a major factor.3
When you eat right, exercise consistently and see a doctor regularly, you may be bolstering your earning potential as well as your constitution. Health problems can hurt your income stream and reduce your chances to get a job, and medical treatments can eat up time that you could use in other ways. Good health can mean fewer ER visits, fewer treatments and fewer hospital stays, all saving you money that might otherwise come out of your retirement fund.
Investment Advisor Representative with and Securities and Investment Advisory Services offered through Transamerica Financial Advisors, Inc. (TFA) member FINRA, SIPC and a Registered Investment Advisor. Non-Security products and services are not offered through TFA., Risser Financial Services, and TFA are not affiliated.
1 – individual.troweprice.com/staticFiles/Retail/Shared/PDFs/retPlanGuide.pdf [5/10]
2 – online.wsj.com/article/SB10001424052748703529004576160693310435366.html [3/7/11]
3 – www.dailyfinance.com/2012/09/03/postponing-retirement-70-not-the-new-65/ [9/3/12]
Recent Forum Host Articles:
- Strategies for Increasing Your Retirement Annuity and Income  by Dennis Damp
- Your Annual Financial To-Do List  by Paul Risser
- What Will You Do in Retirement?  by Dennis Damp
- Best Dates to Retire 2012 and 2013  by Dennis Damp
Visit our other informative sites
- Federal Government Jobs & Career Center 
- FREE Federal Employee’s Retirement Planning Guide 
- Federal Retiree Job Opportunities 
- Federal Employee & Retiree BLOG 
- Federal Employee’s Career Development & IDP Center 
- Post Office Jobs & Career Center 
- Job Search – All Sectors 
- Environmental Health & Safety Job Center 
- Nuclear Jobs and Careers 
- Stolen Car Plates & Recovery Guide 
- Take Charge of Your Federal Career  (A Career Planning Workbook)
- The Book of U.S. Government Jobs  (How to Apply for Federal Jobs)
Distribute these FREE tools to others that are planning their retirement
- 2013 Excel Leave Chart  (target 2013 retirement dates and determine exact leave balances for each date)
- How to be Emotionally and Physically Prepared When You Retire 
- How to be Financially Prepared When You Retire 
- Master Retiree Contact List  (Important contact numbers and information)
- Survivor’s Guide 
- Estate Planning Guide (An 11 part series that will help readers prepare for retirement, understand basic estate planning techniques, and compile their personal “Survivor’s Guide” binder.)
This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Neither Transamerica Financial Advisors, Inc. (TFA) nor its representatives provide legal, tax nor accounting advice. Persons who provide such advice do so in a capacity other than as a registered representative of TFA.
Last 5 posts by Paul Risser
- Reassessing Retirement Assumptions  - May 13th, 2013
- Retirement Seen Through Your Eyes  - April 6th, 2013
- A Roth IRA’s Many Benefits  - March 3rd, 2013
- IRA CONTRIBUTION LIMITS RISE FOR 2013  - February 1st, 2013
- Important IRS Adjustments For 2013  - December 4th, 2012
- Your Annual Financial To-Do List  - November 9th, 2012
- The Major Retirement Planning Mistakes  - October 6th, 2012
- You Can't Hide In Fixed Income  - September 6th, 2012
- THE RETIREMENT REALITY CHECK  - August 9th, 2012
- An Estate Planning Checklist  - July 8th, 2012
- Important issues regarding your benefits  - June 8th, 2012
- THE ROTH TSP OPTION  - May 26th, 2012