The best way to determine the amount of money you can withdraw during retirement will depend on many factors. With lack of proper guidance, one can easily drain way their retirement wealth. A survey conducted reveals that about 40 percent of most financial planners have clients whose biggest worry is running out of money. The rate at which you carry out withdrawal from your retirement account can seriously affect how long the money lasts.
Traditionally, most people who have just retired are encouraged to abide by the 4 percent rule when distributing their retirement benefits. The rule clearly states that you should not exceed 4 percent in withdrawals during your first retirement year. In the subsequent years, you can carry out your withdrawals at a rate that is at par with the inflation rate. This rule was proposed by William Bengen back in the early 1990s and has been adopted ever since as the standard used by financial planners to assist their clients in establishing suitable retirement income strategies.
However, Justin Fort along with other professionals question its relevance in today’s world. According to them, the 4 percent rule was only feasible during the 1990s. Their arguments point out recent factors such as 5 percent bond yields on the 12 percent average equity returns. Most of these conditions are no longer the norm in the economic environment today. The 4 percent rule cannot be relied upon as a benchmark when determining how safely you can make retirement withdrawals. As you form a plan that will help you spend your money in the years to come, here are some key points to consider. Briefly described are some ways on how to calculate your ideal retirement withdrawal rate.
Your life expectancy against your savings
When saving for retirement, ensure you have enough that will last you throughout your retirement. Life expectancy is a very important element when arriving at the ideal retirement age. The 4 percent figure mentioned earlier arrived at an estimation of a 30 year retirement period. If your retirement period exceeds 30 years, you will be at risk of running out of sustenance.
When deciding on the most suitable withdrawal rate, go for an amount that will deliver a high probability without exposing you to the risk of exhausting your cash flow. These variables will include the amounts you have accumulated in your investment accounts, monthly expenses, and pre-retirement incomes. On analyzing this factors, look at life expectancy as this helps point out how much you can spend during retirement.
Diversify your investments
Investors must look beyond their life expectancy and savings as they decide on their objectives and goals. A mix of well-balanced investments can help in making annual adjustments. Some retirees withdraw their funds from equities when the market is high then proceed with withdrawals from their fixed accounts. This is the best time to take a broad look at your asset allocations, as they will be the perfect guide when arriving at a decision. Your asset allocations must be perfectly aligned with the duration you anticipate to retire.