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How much retirement income should you withdraw?

FALLBROOK – When deciding how much retirement income to withdraw, the answer varies for everyone. Here are some important factors to consider.

The big question: how much is too much? In the first few years of retirement, some couples really “live it up” - and some of them risk spending down their retirement savings. Their portfolios aren’t earning enough to make back the income they’re withdrawing.

Some new retirees may end up withdrawing as much as seven to ten percent of their retirement assets annually. A bull market tends to encourage this kind of exuberance. But what happens when the bulls don’t run? What if your portfolio only returns one to two percent this year? Can you see the potential problem?

Ultimately, the answer is highly personal. There is no “standard” retirement income withdrawal rate. Your withdrawal rate should be determined in consultation with your financial advisor, who can help you evaluate some very important matters: your risk tolerance, your age and health, and your lifestyle needs.

Many new retirees are told that a four to five percent annual withdrawal rate makes sense. If you withdraw four to five percent from your retirement nest egg annually and your investments steadily earn about five to six percent year-to-year, it is quite possible that your invested assets will last a quarter-century or longer given mild inflation.(1)

But that’s a rather stable scenario. Even more variables come into play, such as consumer costs. Over the past 50 years, consumer prices have increased (on average) about four percent annually.(2) So you might assume that your portfolio should generate at least a four percent annual return just to help you keep up with the cost of living. But if you retire with that assumption and inflation should spike notably higher for some reason after you retire, you may need to adjust your withdrawal rate.

Now consider the price of health care. In recent years, health care costs have increased at a much greater rate than inflation. The same goes for nursing home care.

Market dips. When you are 35 or 40, your investments have time to rebound from a market downturn. When you are 70, things are different.

Let’s cite a hypothetical example: let’s say you are 70 years old, and you have $250,000 in your portfolio. All of a sudden, your portfolio has two really bad years and you lose 12 percent in year one and seven percent in year two. So at 72, your portfolio is now worth $204,600. You want to get back to $250,000 or better. How long will that take? Well, your portfolio would have to gain almost 23 percent in year three to get back to that $250,000 level.(2) So if you suffer through a couple of bad years with ill-chosen investments or ill-advised asset allocations, your nest egg may be considerably smaller and your income withdrawal rate may have to change.

With ongoing improvements in healthcare, today’s retirees stand a good chance of living into their eighties and nineties (and perhaps even longer). This is a good reason to exercise a little moderation when scheduling retirement income.

Ideally, you will retire with the help of a financial consultant who will meet with you periodically to review your investments and income needs, and adjust your withdrawal rate over the course of your retirement. If you don’t have a personal advisor or a personalized retirement income plan, change that situation today and make sure you prepare for retirement with both.

Citations: (1) [Jan/Feb 2008]; (2) [7/25/08].

Submitted by Jayne M. Byrne, CFP®, Wayne Warner & Associates, Fallbrook. Questions may be directed to (760) 723-1151. Not intended as investment, tax or legal advice.


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