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Back
to Education Center Index Figuring
a safe withdrawal rate in retirement
by
Center for Personal Finance editors
If you're close to retirement, you're probably crunching--or thinking
about crunching--numbers to figure out how much money you can withdraw
in retirement so you won't outlive your resources. But if you don't
follow general guidelines, you may come up short (USA Today Nov.
9 2007).
You don't know how long you're going to live, but you can count
on this: Fixed income won't keep up with inflation, most individuals
can't live on Social Security alone, and fewer than one of five
retirees is drawing a corporate pension now--and that number is
decreasing. With longer life spans, we need to spread our limited
resources over a longer period of time.
What should you keep in mind when calculating a safe withdrawal
rate?
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Life expectancy. Check the charts and add five
or 10 years, taking into account your health and family history.
Use this to determine how long you want your money to last.
-
Don't ditch stocks in retirement. A recent
study by T. Rowe Price came to the same conclusion as a study
conducted by William Bengen, CFP (Journal of Financial Planning
1994) that analyzed historical data: The allocation mix that
yields the greatest success at the time you start taking withdrawals
is about 50% stocks and 50% bonds. Stock allocations less than
50% and more than 75%—either too conservative or too risky—are
counterproductive.
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Start out small. If
you want your money to last 30 years, studies reveal that you
can withdraw 4% of your portfolio during your first year of
retirement. A 3% or even 3.5% withdrawal rate is considered
safest, while an initial 5% withdrawal is considered risky,
and 6% or more is considered gambling with your nest egg.
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Use inflation to calculate subsequent withdrawals.
After the first year, don't use the withdrawal rate to compute
how much you withdraw. Rather, use last year's figure, plus
an inflation factor.
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