Make Your Retirement Funds Last

If you're contemplating retirement, one important question is sure to arise: How much should I withdraw annually from my retirement funds? The answer to this query is more than academic. Draw down too much, and you could deplete your resources early and be forced back to work. Withdraw too little and you may sacrifice needlessly, pinching pennies when you could be enjoying a robust retirement.

Your particular withdrawal rate will depend on a number of variables. You should factor in monthly pension checks; when and how much you'll receive from social security; the size of your accumulated nest egg in 401(k) plans, IRAs and other accounts; the allocation of your investments and expected rates of return; planned expenses during retirement; life expectancy; even contingency savings for unexpected costs. The withdrawal rate is just one piece of a much larger picture.

In general, however, many retirement planners recommend an annual withdrawal rate ranging from a conservative 3% to a more liberal 6%. Some studies have shown that it's best to start with a more conservative withdrawal rate, which can then be adjusted by an annual inflation factor. Again, many factors play into this decision. If you have a generous pension, especially one that's indexed to inflation (an increasingly rare scenario), you may be able to withdraw 5% of your savings every year and still sustain a comfortable lifestyle well into your nineties. In addition, if you've paid off your mortgage and other significant debt by the time you retire, you'll have more flexibility when it comes to withdrawals. On the other hand, if your savings are limited or you'll be relying heavily on social security, you may do well to trim the withdrawal percentage downward.

Here's another possibility: Set up an annuity in lieu of a pension. Generally speaking, immediate annuities can provide fixed lifetime payments in exchange for a lump-sum investment. Some policies are indexed to inflation; some vary with the market. (Remember, however, to exercise caution when considering this type of investment. Scams abound in this area.)

The key is to take a realistic look at your income, expenses, and other factors, then track your cash flow and adjust the withdrawal percentage as needed during retirement.

Seeking professional advice can also help when analyzing retirement assumptions and plans. If you need help, please call.