I’ve been hearing from a lot of retirees who’ve done what they were supposed to do, what they could afford to do. They saved for their retirement years.
But now that they are retired, they aren’t sure how to spend down their savings without going broke before they die.
While no one rule of thumb fits everyone’s situation, many experts say the 4 percent rule may help your money stretch further.
Haven’t heard of the 4 percent rule?
You are not alone.
This rule refers to the percentage of your savings you withdraw each year. For example, if you have $200,000 saved in a retirement account, you would withdraw $8,000 annually. You may also have to make inflation adjustments along the way to maintain your buying power.
“Established in the mid-1990s, the 4 percent rule has long been the standard when it comes to yearly retirement plan withdrawals,” wrote Maurie Backman for The Motley Fool. “Yet a surprising number of Americans have never even heard of it. In fact, in a New York Life survey, 77 percent of adults 40 and up either overestimated the amount of money they could safely withdraw each year in retirement, or owned up to having no idea about the type of withdrawal rate they should aim for. And that only means one thing: Workers across the board had better not only read up on the 4 percent rule, but also start developing their own yearly withdrawal strategies. Otherwise, they’ll risk not saving enough or prematurely depleting their nest eggs down the line.”
But just because the 4 percent rule has worked in the past doesn’t mean it will hold true for the future, writes realdealretirement.com editor Walter Updegrave. For some a 4 percent withdrawal rate may be too much. For others, it could be too little.
Here’s a question Updegrave received from a retiree concerned about the rule.
My husband and I will be retiring soon and are thinking of using the 4 percent rule to draw income from our retirement portfolio. We don’t want to run out of money, but we also don’t want to spend too little. Is there some sort of “reset” we should do periodically to ensure we don’t end up with too little or too much money later in retirement?
Updegrave: You raise an important, but often overlooked, issue when it comes to the 4 percent rule, or for that matter any withdrawal system designed to turn savings into reliable retirement income — namely, that the goal isn’t just to make sure your nest egg lasts as long as you do, but also to avoid withdrawing so little to conserve assets that you live unnecessarily frugally in retirement.
[Read the rest of his answer here: The Right Way To Think About The 4 Percent Rule For Retirement Income]
Just keep in mind some rules are made to be broken. Consider your individual situation when making financial decisions.
Long-term care issues
Next week, I want to discuss long-term care insurance. I would love to hear from anyone with a policy. How much are you paying? Have you seen your rates skyrocket? Have you had trouble getting a claim paid? Send your comments to email@example.com. Please include your name, city and state. Put “Long-Term Care Insurance” in the subject line.
Retirement rants and raves
I’m interested in your experiences or concerns about retirement or aging. This space is yours. It’s a chance for you to express what’s on your mind. Send your comments to firstname.lastname@example.org. Please include your name, city and state. In the subject line put “Retirement Rants and Raves.”
Lots of folks are still commenting on the discussion about when to collect Social Security.
Paul Ansell of Morton Grove, Ill., wrote, “As to when to begin collecting Social Security, 62 or 70, those two extremes were used as examples by readers. They are not the only viable options. I split it down the middle, took it at full retirement (66) and continued to work another two and half years. With a modest annuity that I bought from my 403(b), several small brokerage accounts, and the remainder of my 403(b), we should be okay.”
Connie Gallant from Quilcene, Wash., waited. She wrote, “I will be 70 in May and opted to wait until then to start collecting my benefits. The reason for me was relatively simple: My husband, who is now 86, is still in excellent health and has great longevity in his family. The same goes for me. Although I started getting (and paying for) Medicare at age 66, I very rarely need any services. We have owned our home/property for many years and have no debts. We are both quite ‘youthful’ for our age.”
She continued: “I am still working full-time for a nonprofit organization and I’m very active as a volunteer in other nonprofits, as well as in the Democratic Party locally, currently running the campaign for one of our state representatives. Since I’m still working, I did not see any advantage for me to start collecting Social Security benefits earlier. Providing that I’m fortunate enough to live as long as most of my family members have, I should be able to enjoy the extra income for many years. I can understand why others would want to take benefits earlier. However, I believe this was the best option for me. The extra amount I will be getting by deciding to wait may well, indeed, make a big difference when health care costs rise.”
Love the following observation about retirement in general from retired certified financial planner Vicki Van Horn of Rio Rancho, N.M.
“Not a rant, but more of an observation,” Van Horn said. “Retirement is complicated, a series of unfolding decisions which are subtle, and which most people are as well-equipped to deal with as they are in planning for retirement in the first place — not very. Complicated decisions include, as you note, estate planning, tax planning, the Social Security claiming decision, and proper spend-down rate from investments. And many professionals who claim to help retirees are not at all disinterested, for example, anyone who sells financial products. Others may be, simply, not as well-informed as they need to be. In addition, I don’t see many people talk about the importance of simplifying your financial life as you age. Your 60-year-old-self should be planning for your 80-year-old self, closing redundant accounts and credit cards, auto-paying what makes sense. If there is any time in your life that it is helpful to sit down with an hourly fee-only financial planner, it is close to the time when you plan to retire, even if for only one time.”
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