It’s one of the most important fights of your life. In this corner: You and your hard-earned retirement savings. In the other corner: Inflation, increased longevity, unforeseen circumstances and overspending. To win the “Great Retirement Asset Drawdown Battle,” you need a solid withdrawal plan before you step in the ring.
Can Your Portfolio Go the Distance?
Start by figuring out how long your portfolio needs to last. According to National Vital Statistics Reports, if you’re 55, you’ve probably got 27 years of life ahead. Of course, that’s just an average. With advances in medicine and health care, life expectancies are increasing. Today many people live well into their 90s. It’s wise to plan for a longer time horizon, so you and your portfolio don’t wind up on the ropes.
Next, decide what you want the end-value of your portfolio to be. Who else might you need to provide for? Do you plan on leaving a legacy? Do you have charitable intentions that weigh in on your end value? You’ll need to factor those wishes and responsibilities in when deciding your annual withdraw rate as well.
Don’t Get Sucker-Punched by Inflation or Market Downturns
Consider inflation’s one-two punch and how it will impact your portfolio over time. For example, with inflation historically averaging approximately 3 percent a year, a person needing $50,000 to cover basic living expenses in 2011, will need $67,000 to maintain that lifestyle ten years from now.
Don’t count on too many tax breaks. Federal income tax rates are at an all-time low. Though as a retiree your tax-rate theoretically could be lower than when you were working, the ballooning federal deficit likely means there is only one way for taxes to go: up.
When it comes to investing your assets, take into account your cash-flow needs, end-value objective, risk tolerance and time horizons. Protect yourself against market volatility by keeping an appropriate portion of assets in and higher-yielding, fixed income investments and liquid alternatives, and don’t bank on high percentages of risky investments to produce high returns.
Stick With the Fight Plan
Finally, we come to the subject of spending your money. Many people have unrealistic expectations of how much they can reasonably take from their portfolios each year. Among the industry specialists and endowment overseers that we’ve researched, most recommend annual withdrawals of 3 to 4 percent of your total savings. For example, if you have $1 million saved for retirement, you would withdraw $30,000 to $40,000 the first year. Hopefully, with the proper allocation of investments and a minimum of a five-year time frame, your account will grow by more than 3 to 4 percent annually, so that in future years, you’ll be able to withdraw that same percentage of the portfolio, maintain or perhaps even grow your principal, and still keep pace with inflation. Note: The suggested annual withdrawal rates are based on historical studies and data, and future investments returns will vary and may impact these estimated withdrawal rates.
Last but not least, DON’T OVERSPEND. It may not seem like much, but a new car here, a kitchen remodel there, a son or daughter’s wedding and a luxury vacation later, you may find that you’ve now withdrawn 15 to 20 percent of your portfolio, rather than your planned 4 percent annual withdrawal. Splurges should be the occasion, not the norm. A few rounds of unrestrained spending coupled with an ill-timed market downturn can K.O. your principal before you know what hit you.
Base your budget on your withdrawal plan and stick to it. You’ll find it is prudent to have a professional financial advisor in your corner to help develop your retirement spending plan and who will meet with you and your spouse quarterly to see where you stand and make sure you stay on track.
It takes planning and discipline, but if you keep your eye on the prize, winning the retirement asset drawdown battle is well within your grasp.