Retirement withdrawal strategies are all over the map and it really depends on who you talk to or what you read. As someone who is thinking about retirement and wondering how much money I will have to spend every year, I have been following the retirement withdrawal strategies put forth by many financial planners. Bottom line with all of these guys is that they are trying to sell me something so I need to figure out for myself what the best approach is for my personal situation. There are three main strategies with many combinations of them all, so I thought it would be a good idea to review these for readers. You will have to figure out for yourself based on your personal situation which one or what combination is best for you.
Retirement Withdrawal Strategies
Follow the 4% rule – the simplest one is to take 4% of your balance of savings calculated at the end of the previous year. Since your portfolio will vary every year, your income will vary every year as well. If your portfolio is generating less than 4% in terms of dividends and interest, then your portfolio is going to decline each year and so is your income. Something to think about!
Income only rule – is a good one in that you never touch your principle, but your income will also vary with this approach as well since dividends change, interest rates change and distributions from mutual funds change every year. If you can live on the income only, you will have a better chance of your savings lasting well into your retirement with some left over for the kids.
Variable Amount rule – this approach is based on taking out a fixed amount each year based on how well your portfolio is doing. In good years, you get to take more out, while in bad years when the market is down, your income will be down as well.
Can you live with these variables or are you the type that needs to have a fixed amount coming in each month year over year? The answer to this question will help determine which approach or combination of approaches you decide on!
Retirement Withdrawal Strategies – How long will you live?
The other big unknown is how long will you live? This will determine just how long your money will last and how much you will be able to spend each year. Be realistic, take your health into account and your genes when making this assumption. Good luck with your retirement plan!