Retirement Withdrawal Rates
Inquiring retirees (or soon-to-be retirees) want to know: how much money can I safely take out of my savings? The trick is taking out enough to live on and maintain a decent standard of living, but not so much that you run out of money before you run out of breath. The big unknowns here are your individual life expectancy (how long you’ll live) and what kind of returns you’ll get on your retirement savings in the future. And since those are future-oriented events, no one can tell you with certainty what will happen; the future is unknowable.
Unfortunately, you still have to make decisions now in the face of uncertainty in the future. So you start with some assumptions. How long will you live in retirement? Maybe start by assuming 25 years or so from the date of your retirement. So if you retire in your 60s, figure you’ll live until your mid 80s or 90s.
Then how much can you take out of savings? A somewhat safe mathematical estimate would be about 4%. If you have 100% of your savings amount in dollars and take out 4% per year, that should hold you about 25 years (100/4 = 25). Let’s use a dollar example. If you have $100,000 in an IRA and take out $4,000 per year, the IRA should last 25 years.
Uncertainty enters the picture when you consider how your retirement savings are invested, and how income taxes will affect you. If you invest your savings “safely” in something like CDs or money market accounts, you don’t have to worry about losing any principal. Taking 4% per year could hold you for roughly 25 years plus a few more (because of the interest you’ll earn on your savings).
The big downside to this investment approach is what inflation will do to your standard of living. If inflation averages 3% during your 25-year retirement, your standard of living will have been slowly cut in half. So that $4,000 withdrawal when you started retirement will only feel like $2,000 per year at the end of retirement. “Safe” investments may generate returns that barely keep pace with inflation but usually result in a lower standard of living when you take taxes into account. And you really do have to account for taxes with most retirement savings, even with “safe” resources like Social Security.