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Consumer
Figuring a safe withdrawal rate in retirement
McLEAN, Va. (11/19/07)--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). 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?
* 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. * 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. * 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.
For more information read, “Tapping Your Retirement Nest Egg,” in Plan It: Retire Ready Toolkit.
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