“How am I going to pay my taxes and car insurance?” the Mama moaned. “My Social Security check just isn’t enough to cover the extra this month.”
During the forty years Dad was working, he and Mom carefully put money aside. He has been gone for five years now, and that money has been mostly sitting in accounts for Mom, age 75.
“Why don’t you draw some out now, Ma? You’ll have to do it soon, anyways.” (See below for more on this.)
“You mean, take it out of my account? I can’t put it back.”
This has been one of the hardest questions for people of retirement age:
How much can I take out, year by year, from my investments…and still not run out of money?
It’s called a ‘safe withdrawal rate.’ Or, in About.com‘s words:
“A safe withdrawal rate is the amount of money that you can withdraw from your investments each year, with the ability for future year’s withdrawals to increase with inflation, and with a high likelihood that this money will last for the remainder of your life expectancy, even if investments are delivering below average returns.”
Experts have been estimating how much that amount is for decades. Some agree — some don’t. The standard response ranges all over, from 1% to as much as a quarter of your investments.
The magic number for most financial pundits, though, seems to hover around 4%. In other words, if you have $100,000 in stocks, bonds and money market accounts, you could afford to withdraw $4,000 every year, and technically be all right.
There’s one big problem with a standard response, though, and that is it assumes a certain rate of return. What if your funds didn’t earn much this year…or worse yet, lost money? (We know this one from stock market debacles in recent years.)
The truth is: we don’t know for 100% certain how much to pull out from our capital — because we don’t know exactly when our life will end. No one does. It’s wise, therefore, to consider the following when planning your retirement withdrawals:
*Do I want to leave a substantial nest egg behind when I die? If so, then you will want to pull out as little as possible.
*Am I willing to put off retirement for a few years, so I can add more — and safeguard any possible shortfall in the future?
*Am I willing to make extra income to help during leaner years? Even a few hours a week of part-time work helps balance your money out during retirement. You are limited, however, to how much you can work without penalty, if you’re also drawing Social Security. (A basic explanation is here.) In 2013, that means $15,120. Earn any more than that before full retirement age, and you’ll be docked $1 for every $2 you earn. (Social Security has a helpful page and calculator here.)
*Can I wait to collect Social Security later, rather than earlier? The longer you wait, the higher your check will be.
Other factors to consider: you are required to begin withdrawing from a traditional IRA by April 1 of the year following the year you reach 70 1/2 years old. (See the IRS rules on this.) No ifs and buts on this one — you have no choice. You can reinvest this money, but there is a tax penalty if you do not initially withdraw it…every single year.
Another item that couples don’t always factor in: when your partner dies, your Social Security income automatically halves. (Your individual payment may revise up slightly, based on your partner’s amount — but it will never be as much as it was.)
Or your partner may have refused a survivor’s benefit on their pension, so they can collect more. They die — and the pension disappears. Many widows (and widowers) have suddenly found themselves in financial trouble, by not preparing for this.
Work on it before you retire
Run the numbers on various scenarios and percentages now, while you are planning your retirement. Even if you begin by withdrawing a higher percentage than you should, you can always re-analyze, year by year, and adjust as needed.
Advice is available via the Internet on safe withdrawal rates, including this extremely long and sometimes boring look at various strategies. (It does have some helpful ideas, and is worth trudging through.) Some interesting ‘rules’ are here, too.
This is your retirement — and your money. You are responsible for that, no matter what the experts say. The safest response is common sense. If your investments have not been racking up higher interest for the past few years, it’s time to cut back and withdraw cautiously. If they’re doing well, then you’ll feel easier taking out a bit more. Err on the side of caution.
It may mean the difference between a comfortable, peaceful retirement, or obsessing and worrying about money to the bitter end.