As I was sipping wine with girlfriends last weekend, one turned to me and said, “I’m afraid I’m going to outlive my retirement fund, so I’m not going to take any money out of it until I have to.” She went on to say, “I want to be independent and not a burden to my kids.” She was afraid of outliving her retirement savings.
“How much can I withdraw?” is a question I get asked often by women, often single women, getting ready to retire. We spend so many years saving for retirement (accumulation phase) and don’t think a lot about how much we can withdraw when we reach retirement.
As a matter of fact, for some it’s difficult to even think about withdrawing from their “nest egg” they’ve worked so hard to accumulate. Women like having the safety of a certain amount in their retirement account, and often will delay withdrawing from it.
I’d like to discuss the “Safe Withdrawal Rate” method for retirement. This is one way that retirees can determine how much money they can withdraw from their assets each year without running out of money for 30 years.
Now I realize no one knows how long she is going to live, but you can look at your own health and family history to give you a basic idea of how long you’ll live. According to the Social Security Administration, the average 65 year old woman will live until almost 86.
You can also take a quiz to estimate how long you’ll live. Here are the 12 Best Life Expectancy Calculators.
Once you have an idea of how long you’ll live, assuming no catastrophic event, you still have to know how much you can withdraw from your retirement account. That’s where the safe withdrawal rate comes into play.
It is a conservative approach that does not deplete retirement savings prematurely. It is based largely on your retirement portfolio’s value at the beginning of retirement and each year thereafter.
The safe withdrawal rate is also known as “The 4% Rule” which was the result of the Trinity University study in 1998. It states that given a mix of 50% stocks and 50% bonds, you can withdraw 4% for 30 years and not run out of money 96% of the time. It is assumed that your withdrawal will be adjusted for inflation every year. The portfolio may shrink during periods of a down stock market and grow when the stock market performs well. The goal is to not run out of money for 30 years.
Is this a perfect rule? No, it’s only a guideline, but one that has been tested over 30 years increments going back to 1925. I can tell you from experience, that if you start withdrawing from your retirement account when the market is down (remember 2007?) I highly recommend you withdraw less than 4%, say 3% so you give your portfolio time to recover.
It is also wise to have a balanced portfolio of stocks/bonds to balance each other if a down market occurs. But, you need stocks in your retirement portfolio to keep pace with inflation, and even give your money some growth.
Remember, no one knows exactly how long they’ll live, so let’s plan on using our retirement fund wisely and help it last a good long while!
So if you’re pulling 4% from your assets to cover your financial needs, you’ll need 25 times your annual spending.
For example, if your annual expenses are $60,000, 25 times $60,000 = $1,500,000. OR 4% of $1,500,000= $60,000. Keep in mind that this $1,500,000 includes ALL of your investments.
I know this can get really confusing and it’s why I help my clients do the numbers in detail to make sure they’ve got the income sources they require to live the life they desire.
Schedule your free 20 minute money chat so you can rest assured knowing your retirement income is going to last.