Nearing retirement or already retired? You’re likely wondering how to make sure you don’t outlive your savings.
One rule of thumb says that withdrawing 4% per year from your retirement savings can help minimize the chance you’ll outlive your money. The hope is that the rest of your retirement nest egg will grow in value and/or pay dividends and interest income.
However, there are a few possible flaws in that scenario. First, because interest rates have been low for the last several years, bonds and other fixed-income investments are providing less retirement income than expected. Second, your income needs may fluctuate from year to year if you face unplanned expenses. Third, if you’re investing in stocks or bonds, your savings may decline in value if either of those markets fall. That means a smaller nest egg to draw from.
Finally, inflation will continue to erode the purchasing power of your money over time, forcing you to withdraw larger amounts of money to maintain the same quality of living.
Tapping your retirement nest egg
How do you turn your nest egg into retirement income? Your financial situation in retirement will likely change from year to year and could affect how much money you will need.
An income floor is the amount of money you need to live on, without considering any outside factors like the market. It’s money that you know will be there, no matter how long you live.
The age at which you first claim Social Security can be a big factor in determining your drawdown strategy. You can elect to start taking benefits as early as age 62. But there may be advantages to waiting until you’d receive full benefits. If you wait until full retirement age (65 to 67), you can receive full benefits. If you wait beyond full retirement age to claim benefits, they increase even more each year until you reach age 70.
For the part of your savings you don’t annuitize, consider making withdrawals based on your income needs for that year, as well as the underlying investment performance of your nest egg. For example, you might postpone a big vacation after a year in which your assets fall in value.