Yesterday I posted part one of this topic Why Retirees Should Have Equities In Their Portfolio.
One of the biggest concerns for retirees is the fear of running out of money. If you are retired and living off a pension which is indexed for inflation then you don’t have much to worry about since the pension should keep going until you expire. What happens if you have no pension or only a little bit of pension income from a source like a government pension plan? Then you need to live off income from your investments.
How much can I safely withdraw from my retirement funds?
Simple – use the 4% rule. This will give you a great chance of not running out of your money and it’s valid for 25+ year periods. If you are at an advanced life stage where 25 years is a dream then the 4% can be adjusted upwards.
The way the 4% rule works is that you start by taking 4% out of your portfolio in the first year – this includes dividends, interest, withdrawals. The next year you take out the same figure you took out the first year plus inflation. So if you start by taking $40,000 out and then inflation is 3% then the second year you take out $40,000 + 3% ($1200) = $41,200. Every year after that you adjust the previous year’s withdrawal amount by the inflation rate.
Keep in mind that this amount only covers the withdrawals from your investments. Any other income you have, such as pensions, will be in addition to the withdrawals. If you find the 4% rule doesn’t give you enough income then you can either cut back your spending or increase the withdrawal amount (which will increase the chance you will run out of money later on).
The 4% rule is really a guideline rather than a hard and fast rule – If your equities perform better than expected then you can spend a bit more than the 4% rule amount however the opposite is also true, if you encounter a bear market and the value of your portfolio drops then you should be prepared to cut back on the withdrawals.
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[…] 4% Withdrawal Rule. How much should I withdraw during retirement? We often use the 4% rule to protect the principle and determine how much one can take from the retirement savings. Four Pillars offers an excellent explanation of how the 4% rule works. […]
Why not take all the guess work out of it and buy a life insurance policy and an immediate annuity to boost your income for life? If you have a portfolio of 500,000 and life insurance in retirement of 500,000 you could put your account into an immediate annuity to receive an income much higher than 4% that you cannot out live. The life insurance protects your spouse from premature death so you can get the higher payout. Just like options on your pension, having the life insurance gives you the permission to take the highest payout while you and your spouse are enjoying retirement. If you predecease your spouse the life insurance will refill the account for his/her use. No market risk.