One of the biggest fears of retired people is outliving their money. An article in richtopia.com states a few strategies for withdrawals during your retirement to minimise the chance of running out of money.
According to a recent survey, the biggest retirement fears relate to being able to financially cover your expenses once the paychecks stop flowing.
Following are a few strategies you should consider to tilt the odds in your favor.
The most important aspect is how much you save prior to the retirement. If you are running behind plan, don’t retire until you have a sufficient investment portfolio to fund your retirement. Once you have left the workforce, it’s very difficult to reverse course and find a position paying the income you were making before you retired. Be patient if necessary, and start from the strongest possible base.
Don’t withdraw too much from your portfolio in any given year. While the historical 'rule of thumb' has been to limit your early retirement 'paycheck' to 4 per cent of your investment base, be cautious. A better assumption to insure you outlast your money is to start at a 3 per cent withdrawal rate if at all possible given today’s low interest rate environment. For every $1 million saved, you should only 'pay yourself' $30,000 (3 per cent) to $40,000 (4 per cent) of post-retirement income.
Historically, the rule of thumb has been to start with your “Year 1” withdrawal rate and increase it by the rate of inflation. new studies on increasing the odds in your direction now favor a new approach:In A Bear Market – take a pay cut, in A Bull Market – give yourself an increase.
Since taxes must be funded by the same portfolio now providing your paycheck, any reduction in tax provides more funds for your living expenses. In general, a retiree should look to spend after-tax money first, followed by IRA funds, leaving Roth money as the last money withdrawn. There is a vast amount of information on this topic, and anyone approaching or in retirement should spend the time to research and understand the topic.
You have to optimize social security and this will be one of the largest decisions you face as a retiree. In general, the longer you can defer starting your withdrawals, the better social security benefits compound at an 8 per cent annual growth rate, which is the best 'no risk' return you can earn.
Finally, don’t forget about annuities. While these have gotten some bad press, the reality is that there are some very viable options available to meet some critical retirement needs. In annuity, you place a significant portion of money with an insurance company in return for a lifelong income stream through retirement.
Though you are several years away from retirement, you can investigate annuities closely as a guaranteed income option, though with lower returns (and less risk) than are typically available through equities.
If you are able to follow these approaches you should be able to minimise your risk of outliving your money.