For people close to retirement who are feeling anxious about having sufficient funds, there’s some…
How much of your retirement savings should you plan on taking out each year? Many retirees’ number one fear is outliving their savings, and that’s a question which is at the top of their minds. A common figure is the “4 percent rule”, which says you should plan on taking out no more than 4% of your savings each year. In today’s low-interest environment, many financial advisors are recommending even lower amounts, closer to 3 or even 2 percent.
But a survey of people age 65 or over who had assets of more than $100,000 found that many did not stick to this rule at all – and some advisors say that’s not necessarily a bad thing. The survey found that 12% of respondents took out 9% or more, while 28% of respondents withdrew less than 1%, some nothing at all. Another survey found that many retirees actually moved to a new home shortly after retiring, 30% of them to a larger or more expensive home.
Some reasons people took out more than 4% were to pay for one-time purchases or health or living expenses. Of those who took out less, some were concerned about running out of money in retirement, while others were still working or had pensions or Social Security and didn’t need to dip into their savings.
While financial consultants still advise being cautious with finances in retirement, many believe a one-size-fits-all strategy like the 4% rule may not be the best approach. Many retirement “rules” are based on historical data and predicted returns in the future and may not be suited for all situations.
Being ready for retirement involves more than having enough money. It also requires having a plan for what to do with your next phase of life, to make it rewarding, fulfilling, and pleasurable. If that means occasionally taking out a small chunk of your savings for something which will make your retirement life richer, some advisors are pointing out that that’s what the money is there for.
Wes Cross, in his highly-regarded book You Can Retire Sooner Than You Think, found the happiest retirees were those who were neither extravagant nor excessively tight with their personal spending. They realized the purpose of having money in retirement was to have a fulfilling and enjoyable retirement.
More important than adhering to a rigid rule, is deciding on the retirement plan that fits you best. Assess your financial situation, estimate your expenses in retirement, and then run some numbers to see if you can make it work. Here is a list of tools that can help you run through various scenarios.