My husband and I are newly retired. Our mortgage is paid off but we do travel quite a bit to go see our kids/grandkids. We have about $1.5m in our retirement accounts at the moment (we're 68 and 71 respectively) and we want to make sure we strike a good balance between withdrawing too much and being too frugal and missing out on experiences. Even just basic ranges would be appreciated. Thank you.
Withdrawal rates are tricky, because performance directly impacts the likelihood of success. But a simple way to look at is how much could we take out on an annual basis if we earned nothing. Basically left it in cash. The answer is if you both wanted to reach 100 you would be able to withdrawal $46,875 per year. That really should give you a baseline of thinking. Withdrawal rates also need to be flexible when it is needed. Taking slightly less in really bad economic times can have a profound impact on later years.
I recommend talking with an advisor that can give you specific advice for your situation. Some other great tools to give you a range can be found on Fidelity.com. Specifically the Income Strategy Evaluator: http://personal.fidelity.com/planning/retirement/ise.shtml?imm_pid=1&immid=00528&imm_eid=e28434175&buf=999999
Be very leery of product solutions to this withdrawal rate problem though. In my opinion, annuities are commonly oversold in these and every other retirement situation. If something sounds too good to be true it is. Remember that retirement is a marathon, not a sprint. Slow and steady wins the race.
Hi Sadie, it sounds like you guys are off to a great retirement! The general rule of thumb for withdrawal rates in percentage terms is about 4%. As Eric said, depending on your individual circumstances that number may vary, but a range of say 2.5% to 5% is probably in the ballpark. Realize you can always vary that percentage from year to year as needed, or as circumstances change (maybe you have an unexpected big medical bill one year, so you need to take out more than usual; maybe in another year, your investments perform really well so you can cut back the percentage rate while still meeting your income needs; etc.).
For a specific answer, talk with an advisor who specializes in retirement income.
Enjoy your travels! Mike
Sadie Good advice from Michael and Eric. Based on a BlackRock study of withdrawal rates it really depends on how your retirement assets are allocated between Stocks and Bonds and the length of retirement years. Assuming a 25 year retirement time horizon and a 60/40 split stock to bonds a 4% inflation adjsuted withdrawal rate you can be 93.6% comfident your assets will outlast your 25 year period. At 5% inflation adjusted withdrawal rate you can be 77.2% confident. For more information go to www.blackrock.com Rtirement withdrawal rates. Good luck Mark Schreiber CPA
I agree you should look deeper at your specific circumstances given the complex interaction of variables. In addition to after-tax analysis and determining what type of accounts your assets are held, the original "4% rule" research paper and subsequent updates point out another key variable - inflation. Interestingly, this tough cycle we just went through is not as severe as one would expect given the very low inflation rates. Recall what the 4 in the "4% rule" is: you only use it in year 1 to withdraw 4% of your original balance. Each subsequent year's withdrawal is calculated in dollar terms only by increasing the previous year's amount by actual inflation. But that assumes your income needs are smooth each year Perhaps you will be visiting the grandkids more in your early years of retirement and adjust the flows accordingly. Make sure to factor in the cost of ice cream! Enjoy.
Without sounding too self-serving to the profession, you owe it to yourself to discuss this with an experienced financial planner. While rules of thumb can be good starting points, there are many factors that go into each person's particular situation and this is too critical of an issue for you to shortchange the process. A few other considerations in additions to the comments that preceded mine: You should break down your expenses into fixed and variable and to the extent that you have guaranteed sources of income to cover your fixed expenses (eg social security, pension, possibly annuities), you can use the rest of your portfolio to cover your more variable expenses and during periods of negative returns, consider reducing some of these expenses and ruing more favorable investment periods, you can accordingly spend more.
Great info from everyone here. I wanted to give you a bit of info about the actual withdrawal of assets from your retirement plan. This will help you understand the intricacies of taking money out of qualified plans.
Retirement Plan Distributions When it comes to receiving the money accumulated in your employer-sponsored retirement plan — you are faced with a few broad options. Should you take the payout as systematic payments, a lifetime annuity, or a lump sum?
Systematic Withdrawals Some retirement plans may allow you to take systematic withdrawals: either a fixed dollar amount on a regular schedule, a specific percentage of the account value on a regular schedule, or the total value of the account in equal distributions over a specified period of time.
The Lifetime Annuity Option Your retirement plan may allow you to take payouts as a lifetime annuity, which converts your account balance into guaranteed monthly payments based on your life expectancy. If you live longer than expected, the payments continue anyway.
There are several advantages associated with this payout method. It helps you avoid the temptation to spend a significant amount of your assets at one time and the pressure to invest a large sum of money that might not last for the rest of your life. Also, there is no large initial tax bill on your entire nest egg; each monthly payment is taxed incrementally as ordinary income.
If you are married, you may have the option to elect a joint and survivor annuity. This would result in a lower monthly retirement payment than the single annuity option, but your spouse would continue to receive a portion of your retirement income after your death. If you do not elect an annuity with a survivor option, your monthly payments end with your death.
The main disadvantage of the annuity option lies in the potential reduction of spending power over time. Annuity payments are not indexed for inflation. If we experienced a 4% annual inflation rate, the purchasing power of the fixed monthly payment would be halved in 18 years.
Lump-Sum Distribution If you elect to take the money from your employer-sponsored retirement plan as a single lump sum, you would receive the entire vested account balance in one payment, which you can invest and use as you see fit. You would retain control of the principal and could use it whenever and however you wish.
If you choose a lump sum, you will have to pay ordinary income taxes on the total amount of the distribution in one year. A large distribution could easily move you into a higher tax bracket. Another consideration is the 20% withholding rule: Employers issuing a check for a lump-sum distribution are required to withhold 20% toward federal income taxes. Thus, you would receive only 80% of your account balance, not 100%.
To avoid some of these problems, you might choose to take a partial lump-sum distribution and roll the balance of the funds directly to an IRA or other qualified retirement plan in order to maintain the tax-deferred status of the funds. An IRA rollover might provide you with more options, not only in how you choose to invest the funds but also in how you access the funds over time.
Generally, after you reach age 70½ you must begin taking required minimum distributions from traditional IRAs and most employer-sponsored retirement plans. These distributions are taxed as ordinary income.
Before you take any action on retirement plan distributions, it would be prudent to consult with a tax professional regarding your particular situation.
Sadie - there are three principal factors that will affect your withdrawal rate:
(1) Your time horizon - effectively your life expectancy; (2) Your expected personal rate of return on your investment portfolio; (3) The terminal value, if any, that you wish to gift to your heirs.
Of course it is possible to make the withdrawal calculation far more complicated, by considering inflation (escalating nominal withdrawals rather than level withdrawals), adjusting the payout rate based on trailing returns, providing a greater margin of safety, etc. But you mentioned that you are looking for some general ranges.
Here are three scenarios for you:
Life expectancy of longest life: 95 Time horizon: 27 Rate of return: 5.00% Terminal value: 0 Withdrawal rate: 6.83%
Life expectancy of longest life: 95 Time horizon: 27 Rate of return: 3.00% Terminal value: 0 Withdrawal rate: 5.46%
Life expectancy of longest life: 95 Time horizon: 27 Rate of return: 3.00% Terminal value: 20% Withdrawal rate: 4.97%
In short, I believe you could safely plan to withdraw close to 5% and still have a significant margin of safety. However, I would advise you to dive deeper and consider a plan that focuses on your after-tax cash flow, since this is really more relevant to your situation than nominal pre-tax rates. After all, you generally can't pay for lunch or buy a plane ticket with pre-tax money! Feel free to respond if you have any questions or would like to consider another specific scenario.
In this day and age a good rule of thumb if you are managing the withdrrawals yourself is to withdraw no more than 4% a year. In recent years though there have been a number of excellent annuity products that have come to the market that provide access to upside moves in the markets using "lock in" provisions along with some type or Guaranteed Lifetime Income Rider. These riders have an associated fee, but may give you more than the 4% withdrawal rate and provide a place to put a portion of your retirment assets to provide a stable base of income which can go up over time. Contact an independent insurance agent or financial planner in your area to find out more including all the fees involved.