This story is part of Money magazine’s story 5 retirement choices: Get ’em right, live well which covers big decisions that can dramatically boost your income in retirement.
Once you determine how much of a saver you are, you have several more decisions to make — including how to safely draw down your retirement savings.
Decision No. 5: How much can you draw from your savings?
The decision: After you stop working, you’ll have to figure out how much you can safely take out of your retirement portfolio each year — a daunting task.
Why it’s important: The conventional strategy is to start with a modest withdrawal rate — typically 4% or so — and then adjust for inflation annually.
Doing that usually means you’ll have an 80% or so chance that your savings will last at least 30 years.
When it comes to tapping your retirement accounts, however, you’re walking a fine line: You don’t want to run out of money — even a 4% withdrawal rate can deplete your savings quickly if the market dives right after you retire.
You also don’t want to be so frugal that you end up with a huge balance you could have enjoyed earlier. Follow the 4% regimen strictly and see your investments perform well, and you could wind up late in life with as much money, if not more, than you started with, which means you would have scrimped more than was necessary.
Best move: Recalculate your withdrawals every year to take into account your current account balances and the fact that your nest egg doesn’t have to support you for as long.
Morningstar estimates that annually adjusting the amount you pull from savings rather than simply upping your initial draw by the inflation rate can increase the amount of spendable income you pull from your portfolio by nearly 9%.
“It’s the single most effective way of boosting your income during retirement,” says Morning-star’s Blanchett.
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As a practical matter, though, recalculating your withdrawal rate this way can be quite complicated. So unless you’re working with a financial planner capable of doing the number crunching for you, your best bet is to go to an online tool like T. Rowe Price’s Retirement Income Calculator every year, plug in your most up-to-date information, and adjust your withdrawals up or down as necessary.
With a decision this big, you don’t want to blindly stick to the 4% rule or any other rigid system for spending down the hard-earned rewards of your years of careful planning, saving, and investing.