Make your savings last a lifetime
No one wants to run out of money in retirement. So the burning question is how much can — or should you — withdraw from savings each year?
- Many financial planners suggest following the 4-percent rule. Multiply your initial retirement savings by 0.04, then withdraw that amount every year to live on. You probably won't run out of money this way, but without adjustments you may take out too little in years when your investments do well and too much in years when they lose value.
- Some retirees try to live on just the income from their investments. That might work for wealthy folks with huge posts of cash earning oodles of interest, but ordinary people would have to live like Old Mother Hubbard and her bare cupboard with this method.
Solid research now shows that two other ways work better, letting you live comfortably without the worry of going broke.
Plan for you lifetime.
How long will you live, anyway? If only you knew. Should you splurge on that dream vacation or start pinching pennies now? Well, the Internal Revenue Service (IRS) thinks they've nailed down this statistic. They even print it out, in black and white. Call them at 800-829-1040 and request publication 590-B, or download it from the IRS website at irs.gov/publications. Then flip to the Life Expectancy tables in the Appendix.
To use this info for financial planning, each year you'll have to do a little math.
- Figure out how much money you have in your retirement accounts.
- Look up your current age in the IRS table and note your Life Expectancy. This is the remaining number of years the IRS says you will probably live.
- Divide your total savings by that number.
- Withdraw that amount from your retirement account for the year.
Say you have $80,000 in your 401(k), and the IRS table says you will probably live another 14.1 years. Dividing $80,000 by 14.1 equals $5,674 — the amount you can afford to withdraw for the year without threatening your future. Two pieces of this equation will change every year — the balance in your retirement account and the number representing your life expectancy.
One drawback here is that the IRS tables don't take into account your medical history current health, or gender. And all of these affect how long you'll live. So maybe you'll want a more accurate idea of your life expectancy, to limit your chances of outliving your savings.
Go to the website myabaris.com/tools and click on the Longevity Calculator. Answer the questions, and Abaris will tell you how long you can expect to live based on these factors. Subtract your current age from your life expectancy. Then divide your retirement savings by that number to get this year's withdrawal amount.
Take out the interest, too.
Want to get even closer to the ideal withdrawal rate? Follow the steps above, then figure out how much interest and dividends your savings earned last year and add that to your annual withdrawal. So if your $80,000 earned $2,800 this year you can afford to withdraw $5,674 plus $2,800.
- FC&A Staff Writer