You’ve been carefully planning and saving for retirement for decades. The last thing you want is to run out of money during your golden years and be forced to go back to work. That’s why it’s important to calculate a sustainable withdrawal rate for retirement. Figuring out how much money you can safely withdraw each year will ensure you have enough income to live on now and in the future. Here are some tips that will hopefully help you make your nest egg last.
The 4% Rule: A Sustainable Withdrawal Rate for Retirement
During your retirement planning, you probably came across the 4% rule. It was created by financial advisor William Bengen and backed up by data from the Trinity study. The Trinity study looked at historical stock market data from 1926 to 1995 to determine safe withdrawal rates for retirement portfolios.
The researchers found that 4% was a safe annual withdrawal rate for portfolios that were made up of 50% stocks and 50% bonds. If you retired during any 30-year period between 1926 and 1995, your nest egg would have a 100% success rate, meaning your money wouldn’t run out. You could even give yourself modest cost of living raises every year without affecting your success rate.
The Trinity study was updated in 2014 and the results were the same, so the rule holds up. However, some experts say that relying on historical data in our changing times may not be the best idea. In this low interest rate environment, bond yields have taken a hit. Since returns from bonds and other fixed-income investments are low, a 4% withdrawal rate may be too high. Instead, they suggest using a 3% annual withdrawal rate to make your portfolio last.
Still, the 4% (or 3%) rule is a decent guideline that can help you estimate how much money you’ll be able to safely withdraw in retirement.
Your Situation Affects Your Sustainable Withdrawal Rate
The 4% rule is a good starting point for your retirement planning. But your personal financial situation will affect how much of your nest egg you can spend each year. The Trinity study is based on a 50% stock and 50% bond asset allocation. If your portfolio is more conservative (say 25% stock and 75% bonds), your chances of success with a 4% withdrawal rate may be lower.
Another thing to consider is that the Trinity study only covered 30-year retirement periods. You may have a longer retirement than that, especially if you’re planning to exit the workforce early.
You’ll also need to account for taxes and other sources of income when considering your withdrawal rate. If you have a tax-deferred retirement account like a traditional IRA or 401(k), you’ll need to pay income taxes on the money you withdraw, which reduces your spending power. This may mean that you have to increase your withdrawal rate to cover your bills or pick up some part-time work to bridge any gaps.
But if you have other sources of income in retirement like Social Security or a pension, you may not need to withdraw 4% from your retirement account to live comfortably. If you can reduce your annual spending and leave more money in the market, you’ll have a higher chance of success.
What withdrawal rate are you planning to use in retirement? Let me know in the comments section below!
Read More
Loan or Save: What Is the Best Way To Fund Your Business?
Here’s How to Retire Well in 2022
Best Retirement Communities in Alaska
Come back to what you love! Dollardig.com is the most reliable cash-back site on the web. Just sign up, click, shop, and get full cashback!
Vicky Monroe is a freelance personal finance and lifestyle writer. When she’s not busy writing about her favorite money saving hacks or tinkering with her budget spreadsheets, she likes to travel, garden, and cook healthy vegetarian meals.
Comments