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What's the Correct Amount to Withdraw from Your Retirement
Funds Each Year?
Rules of thumb and guidelines abound in every investment
arena — you'll always hear about specific percentages you should
save, spend or invest based on where you are in life. They're
made to draw attention to specific investment needs everyone
has, and for that reason, it's good to have them.
A popular one is that no one should spend more than 4 percent
annually of the value of their nest egg in any given year.
Another is that retirees only need 70-80 percent of their last
working year's income to maintain their standard of living.
The reality is that everyone's retirement goals are different
and should be planned based on specific needs, not general rules
of thumb. This is why retirement plans should be made with the
aid of experts in tax, estate and investment issues. A good
starting point would be a meeting with a CERTIFIED FINANCIAL
PLANNER™ professional who could go over your personal
situation and define particular percentages that can be
withdrawn from your overall retirement nest egg while you
continue to work or relax.
What's the downside of not planning? Wachovia's recent fourth
annual Retirement Survey showed that many retirees enter their
post-working years with no idea — or limitations — on how much
of their nest egg they'll spend on an annual basis. The
financial firm reported that 28 percent of surveyed retirees
with average total savings of $375,000 withdraw 10 percent or
more of their retirement savings annually to pay for expenses.
Further, only one-third (38 percent) pegged their withdrawal
rate at 5 percent or less. Only about half (47 percent) said
they had a written withdrawal strategy, and only 28 percent said
they have a written budget for spending their savings.
Here are the major ways to determine an appropriate amount to
withdraw each year in retirement:
Define a vision of retirement and revisit it every year.
Anyone who has worked with a good investment manager or
financial planner has addressed the kind of retirement they
envision. Incorporating part-time work into the retirement
picture might make other financial goals more affordable. A
person who manages his or her finances or works with an expert
needs to revisit those goals annually to assess the feasibility
of affording a particular lifestyle in retirement.
Track working-life expenses for 3-6 months. This is
where that vision of retirement becomes real. Understanding what
an individual spends on lattes and late-night carryout may
motivate an investor to shift his behavior from spending to
saving.
Create a worst-case health scenario. For many
retirees, increasing healthcare expenses and the cost of
end-of-life-care account for significant spending. As a result,
many retirees may pay for expensive experimental treatments to
fight disease or long-term assisted living or nursing home care.
According to AARP, annual nursing home costs will be at more
than $100,000 a year in the next two decades compared to their
current annual range of $45,000-$60,000. While public aid picks
up medical expenses for those who exhaust their assets in most
states, most of us desire more than minimal standards of care.
Shift into a retirement investment strategy in stages.
With a clear majority of investors having inadequate retirement
funds in place near or at retirement age, it may seem silly to
talk about investing post-retirement. But the younger an
investor is, the more valuable the conversation. Good advisers
can help build more balanced portfolios that fit the exact needs
of the investor as retirement nears.
See how long you can put off taking Social Security.
The Wachovia study also reported that the majority of
respondents planned to start taking Social Security benefits at
age 62, the earliest point possible. Another 17 percent reported
taking Social Security benefits at age 65. Only 9 percent
reported delaying Social Security benefits past age 65. Even
though no one will get rich off of Social Security, delaying
taking those payments will result in larger payments later, but
get advice to see if that decision is right for you.
July 2008 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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