Celebrating 13 Years of Serving Seniors

Living Within Your Means—and Assets

Living Within Your Means—and Assets Living on your retirement savings can be a constant balancing act between two competing forces: maintaining your standard of living and making sure you don’t outlive your savings. How do you know if you’re withdrawing too much from your financial portfolio and threatening your ability to enjoy life as you age? Or maybe you’re taking out too little, refraining from the kind of activities you desire, such as traveling, only to end up with more than adequate assets when you die. There are no easy answers to this dilemma, although retirement experts offer a few suggestions.   The 4 Percent Rule The traditional standard for how much money you should withdraw each year after retirement is the 4 percent rule, in which you withdraw a fixed amount from your portfolio on a periodic basis. Typically this is adjusted for inflation annually, so the amount grows over time while remaining constant in real terms. In other words, you maintain the same lifestyle from year to year. Under this formula, retirees add up their investment accounts and retirement savings, such as 401(k)’s and IRA’s, and then withdraw 4 percent of the portfolio’s overall value in the first year of retirement. The next year, the retiree takes out another 4 percent plus the rate of inflation, and so on. Although it’s called the 4 percent rule, the typical withdrawal range is between 4 and 5 percent. A similar method is to base withdrawals on the value of the financial market. One expert found that withdrawing at a rate around 5.5 percent when markets are strong and reducing the withdrawal amounts when times are tough is a better standard than withdrawing at a fixed rate. Fixed Annuities offer another simple way to withdraw retirement funds because you’re promised the same income payments for life. However, most annuities are not inflation adjusted, which means your payments won’t keep up with rising prices of good and services. One drawback to an annuity includes the fact that you have used your funds to purchase the annuity, making extra withdrawals and access to emergency funds difficult to access. Further, if you die early, you may forfeit any money left in the annuity.   Newer Models Another fixed approach is to base your retirement withdrawals on your life expectancy. The Social Security Administration provides tables that give averages. Of course, you need to keep in mind your health and your genetic disposition toward life-threatening diseases such as cancer. In its simplest form, to figure out how much you could withdraw each year, divide your savings and investments by your remaining years. For example, if your life expectancy is 20 more years, you could withdraw one-twentieth every year. However, if your assets keep growing, you might have more left than you planned, and that money may have been better used when you were younger...