Setting Your Retirement Number

Question: How much of your retirement savings should you draw out each year?

Answer: No one knows for sure, but there are several opinions.

Opinion #1:

In the main, most experts now say retirees should withdraw no more than 4% or 5% per year from their investment accounts. But as with all things financial, there is plenty of debate as well as plenty of exceptions to the rules.

Opinion #2:

For instance, Stuart Lucas, author of "Wealth" and chairman of Wealth Strategists Network in Chicago, is at one end of the spectrum. He says retirees should "spend" no more than a meager 3%, after taxes no less, from their investment accounts. "Spending anything more than 3% of one's retirement portfolio is not prudent if you want your money to last," he says.

Opinion #3:

Carlson, meanwhile, takes a slightly different approach to 'the number.' He says withdrawing no more than 4% to 5% of the portfolio the first year, and then adjusting that dollar amount for inflation each year, is not an ideal solution. With that approach, he says retirees would underspend and deprive themselves, especially if they retire at the start of a severe bear market.

Opinion #4:

Others, meanwhile, say Americans need to focus less on the rule-of-thumb withdrawal number and more on their individual circumstances. John Marcante, a principal with Vanguard Group and leader of Vanguard's just-launched Advice Services, says retirees should examine their cash flow needs and then examine how well their own portfolio would have performed, both in terms of growth and in terms of providing the necessary cash flow on an inflation-adjusted basis, in thousands of scenarios until they become comfortable with their plan.

This seems like such a simple question, but when you peel back the layers, there's a lot to consider. And since there's a really big downside (like running out of money with no way to replace it and 5-10 years left to live), you don't want to screw this one up.

This issue is a key one for me since I'm in the process of determining my retirement number. Right now, I'm leaning between using a combination of #2 and #4 above. I think planning to use #2 will give me a good, general sense of the size of the number and #4 will help me plan for specifics once I get closer to retirement. I also plan not to retire fully, but to down-shift my career, still earning a decent income and keeping myself active for at least part of my "retirement."

For more thoughts on the issue of retirement, see these links from Free Money Finance:

• The Money Move You Must Get Right: Rollover Your 401k the Right Way


• Why You Need a Roth IRA


• Three Big Mistakes in Retirement Planning

Comments

[Jose]

I set it up very easily: Something achievable.

Since many families live with around 40,000 I use that number as my inmediate goal. I must try to reach it as fast as I can.

Yes, my networth's 4% should provide for 40,000. 40,000 / 0.04 = $1 Million Dollars!

Would I need more? No. If other families of 4 live with 40,000 I will be able to support myself and up to 3 other people indefinitvely. (not counting any social security).
Would I want more? Yes. I like to live nicely. But I will increase the goal once I get the first million. For now it is getting a million dollars AS FAST AS I CAN.

BTW, my wife is trying the same... independently. It doesn't matter if one of us can't reach the goal, at least one of us would have done it. In the best case we will end up with 80,000 a year to support us.

[Stephen]

Scott Burns has recently done a series of articles on this very subject. He advocates the use of software to perfom 'Consumption smoothing'.

http://www.dallasnews.com/sharedcontent/dws/bus/scottburns/columns/2006/vitindex.html

[Michael]

Oddly enough, I put together a spreadsheet to come up with a reasonable retirement number assuming an annual outflow of $100,000 in today's dollars. That's actually more than twice as much as my wife & I currently spend, but I figured I'd need a buffer in case of medical issues not fully covered by insurance/medicare or some other large problem. In any case, I used that to run the numbers backward assuming we both live to 100 (not likely - most of the longevity in my family history has been the women, not the men, and my wife can't recall any ancestors living to 90, let alone 100, but who knows what medical advances might happen between now and then.) When I match the contributions & projected returns of our current investments to the amount required to support a $100,000/year retirement, they end up meeting at a value that would require us to withdraw around 4.8% of our nest egg each year. Of course, we'd be hoping to continue to see some investment returns during retirement so that we don't run out too quickly.

[Duane Gran]

In truth, there are numbers plural:

1) The amount of investments to retire well. This is the "number" that is most often spoken of, but if a person is young enough to plan for it, a target of 125% of current living expenses is a good target for retiring well. The 70% advocates are usually trying to remedy a poor plan or a late starter's situation.

2) The age at which one retires. This one is diametric to the previous number.

3) The number of years you will live after retirement. This only applies if the plan requires liquidating the principle.

Are there other numbers I'm forgetting?