As we get close to graduating from High School\/College we quickly realize that working for at least the next forty years is a stark reality. We have bills to pay. Many of us invest in our company retirement plan or start a Traditional or Roth IRA. In most cases the overall goal of our lifetime investing is to be able to retire comfortably. Our expenses do not stop once we retire. Social Security checks are a supplement, but one that most individuals will have a hard time living on. According to the SSA.gov website, the average retired worker receives just over $1,500 each month. So, we turn to our retirement account to make up the difference.<\/p>\n
One of the first questions that I hear from clients is \u201cHow much can I withdraw every month and not run out of money?\u201d First, you need to decide what your end goal is. Do you want to spend your last penny on your death bed? Do you want to maintain the principal and forward the balance to your children and\/or charity? Or do you want to grow your account as much as possible, regardless of how little you may be able to withdraw?<\/p>\n
Outside of health, nothing is more fearful in retirement than the thought of running out of money. As a rule, I tell clients that withdrawing 4-5% per year is the best conservative option. Some historical numbers can explain my reasoning. From 12\/30\/1929 to 12\/31\/1999 the S&P 500 Index had an annual rate of return of 10.47%. From 12\/31\/1979 to 12\/31\/1999 the same index annualized 17.85%. Based on these numbers I should be able to withdraw 10% per year and be just fine, right? Well, so far this century (12\/31\/1999 to 10\/30\/2020) the S&P 500 has annualized only 5.94%. If the last twenty years is the \u201cnew norm\u201d then taking 4-5% annual distributions is probably a safer route than what many investors were used to before the turn of the century. The above S&P 500 returns were calculated using \u00a9Bloomberg software.<\/p>\n
A very common and practical way to take annual withdrawals is by taking a fixed percentage that remains constant throughout your lifetime. If you take 5% per year (monthly withdrawals to live on) you will get more per month the following year if your portfolio grows greater than 5% and less per month if your portfolio return is less than 5%. But it is a safe way to ensure that your portfolio will never be depleted. Trust accounts employ this strategy frequently to ensure the beneficiaries won\u2019t squander the proceeds.<\/p>\n
Another very practical way to look at withdrawals in retirement is like the example below. Many times, the conversation goes as follows:<\/p>\n
\u201cI have $500,000 and need to withdraw $4,000 monthly. Will it last me 25 years?\u201d I created a simple calculator that is very useful in giving clients realistic expectations based on their starting portfolio value and monthly withdrawals. I usually use 5% as an annual rate of return. These three numbers can be adjusted annually based on current value. Based on the hypothetical question above, you can see the results below.<\/p>\n
![\"\"](\"http:\/\/investspectrum.com\/uma\/wp-content\/uploads\/Withdrawl1.png\")
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