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Once you’re retired, how much can you annually withdraw from your retirement savings with the least risk of running out of money?
It’s one of the biggest financial decisions you’ll ever have to make, but there’s no easy answer to this question -- especially since you may be depending on your money for some 20 to 40 years. Moreover, it’s hard to plan when there’s no way to know what investment returns or the cost of living will be in the future.
That’s why financial experts have been studying ways to help you figure out how much you can withdraw from your savings, along with ways to make your money last longer. Although the exact amount you can spend from your savings each year depends on many factors specific to your situation, recent studies do offer some guidelines.
Over the past ten years, financial experts have been studying how much you can safely withdraw from your savings each year.*
The overall conclusion of the studies: In general, if you want to be fairly confident that your savings will last for some 30 to 40 years, through both good and bad economic times, you should limit your initial or fixed withdrawal rate to about 4% or 5%.
One method the studies recommend is to initially withdraw about 4% from a portfolio of stocks and bonds, and then annually increase that dollar amount for the general rate of inflation.
Another study suggests that you can increase this initial withdrawal rate to more than 5% from your portfolio of stocks and bonds if you’re willing to follow a set of strict rules. Specifically, in years with negative investment returns you would not increase the amount you withdraw, and in years of high inflation you would cap your withdrawal amount. You would also follow detailed rules for generating spending money from your portfolio.
Alternatively, another study concludes that you can tap your savings by withdrawing a fixed 5% each year – but with limits. Specifically, in years when investment returns are either exceptionally good or extremely bad, you would cap the dollar amount you withdraw by a designated ceiling or floor percentage.
In addition to sticking with a modest withdrawal rate, the retirement withdrawal studies* found that buying an income annuity with some of your savings increases the odds that your money will last.
When you buy a lifetime income annuity, technically called an immediate income annuity, you turn part of your savings into a stream of income that’s guaranteed to last for the rest of your life, or for both your life and the life of your joint annuitant.
If you already own a deferred annuity, you can turn that savings into a stream of lifetime income. Alternatively, you can buy an immediate income annuity to provide lifetime income.
* The Journal of Financial Planning: January 1994, December 1997, April 2001, May 2001, December 2001, May 2003, October 2004
Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.
Representatives are registered, securities are sold, and investment advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor, 2000 Heritage Way, Waverly, Iowa 50677, toll-free (800) 369-2862. Nondeposit investment and insurance products are not federally insured, involve investment risk, may lose value and are not obligations of or guaranteed by the financial institution. CBSI is under contract with the financial institution, through the financial services program, to make securities available to members. CUNA Brokerage Services, Inc., is a registered broker/dealer in all fifty states of the United States of America. The Representative may also be a credit union employee that accepts deposits on behalf of the financial institution.
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