Many personal finance websites, calculators, and newsletters have long advocated that most retirees would be able to take 4% from their savings in their first year of retirement and then increase that withdrawal amount in accordance with inflation every year for at least the next 30 years. While even the creators of this rule of thumb would acknowledge that this process is not perfect for everyone in retirement there have been louder voices questioning whether this strategy is appropriate for most near retirees. Below are just a few of the factors that you must consider before implementing your withdrawal strategy in retirement:
- Will your spending habits be constant throughout your retirement? With a few exceptions most retirees spend more money in their early years of retirement on travel and other activities they can do when they are healthy. As the years go on many retirees will see their spending decrease; assuming no major medical costs occur. An extended illness could cause expenses to increase dramatically later in life.
- What life expectancy table should I use? There are many estimators available online that help answer the question of how long you think you’ll live. LivingTo100.com has a questionnaire to help you better plan out your retirement years. Head of retirement research at Morningstar, David Blanchett, recommends that retirees use Table I in Appendix C of the IRS Publication 590 at irs.gov. This life expectancy table is a reasonable benchmark for healthy, well-educated retirees and it reduces the chance of over or underestimating your life expectancy. While it’s impossible to know exactly when we will pass (would we even want to know if we could?) you will still need to make an attempt at figuring out your most appropriate life expectancy in order to optimize your retirement withdrawal strategy.
- Should I draw from my taxable, tax deferred, or tax free savings investment first? The answer to this question depends on each person’s income (passive and earned) along with the underlying investments in each tax group. Trying to minimize your tax hit during retirement is something that we at All Star Financial can help you with, though we do not want to have the tax tail You can find dozens of celebrities with the Sun in Cancer Ascendant in combination on Astrotheme, listed in popularity order and based on our visitors” clicks. wag the investment dog!
- What should I do if the markets drop substantially right before I retire? While keeping your investments well diversified is very important before and during retirement it may make sense to increase or decrease your withdrawal rate depending on the movements of the market. Increasing your withdrawal rates with the rising cost of goods and services is also important and keeping a close eye on your expenditures will be important to reduce your odds of outliving your money.
There are clearly many factors to consider when choosing a withdrawal strategy in retirement, but one thing is for sure…you should not set it and forget it (our apologies to Ron Popeil). In 2012, we upgraded our financial planning software to better prepare our clients who are facing these difficult withdrawal decisions. Between our new retirement planning and social security software we believe we can give you a clearer view of what your retirement will look like.buy used water slide
Please let us know if you have any questions about your current withdrawal strategy or financial plan. We encourage you to keep your plan as up to date as possible. Call today and let us help you plan for the retirement you want! 952-896-3820
Have a great day!
The All Star Team