Congratulations--you’ve made it to retirement with a nice nest-egg intact. Now the question is: how much of it can you take out each year, without running out of money before you die?
The conventional wisdom: 4% of the total. You don’t have to be an actuary to come up with the reasoning behind that figure: at that rate, your retirement stash should last about 25 years (assuming no investment gains or losses). Considering the length of most retirements, that makes sense, right?
Absolutely not, says the iconoclast of retirement planning, economist Laurence Kotlikoff of Boston University. He says the problem is that no one-size-fits-all number works for everyone. For example, if you retire at age 65 and have a spouse who’s substantially younger --your money would likely need to last more than 25 years. That will also be the case if you end up joining the ranks of the nation’s fastest-growing demographic: centenarians (people aged 100+).
Kotlikoff also notes that in real life, the size of your retirement stash is going to vary from year-to-year, reflecting ups-and-downs in the financial markets. (If you’ve looked at your brokerage statement lately, you’re certainly aware of that!) He says the only way to be sure you don’t over-draw your investment funds in retirement is to do an annual review of how much your account gained or lost in the previous year--and then adjust your spending in the following year to reflect that.
That’s certainly logical, but financial planners tell us that even with a worsening financial picture, few retirees are willing to make big changes in their lifestyle. In fact--several told us that some of their clients are now planning to take out 8% to 12% from their investment accounts, two to three times the usual prescribed level. (At that rate, they better hope that longevity isn’t in their cards!) It’s a big dilemma, and Joe Collum will look at how to deal with it in the series segment that airs on NBR on Monday, November 10.
But what if the unexpected happens--and you’re suddenly forced to pay a sizable expense that you never counted on? (If you’re a retiree, all is takes is waking up one morning with a toothache. The next thing you know, you have a $5000 dental bill, which Medicare doesn’t cover). Do you then get a free pass on taking a special distribution?
Don’t kid yourself--when it comes to retirement spending, there is no such thing as a “free pass.” Don’t believe it? Be sure to tune in to NBR on November 24, when Connie Hicks tackles the subject of “Dealing With Unexpected Expenses.” I won’t give away her story…but after seeing it, you’ll understand why it’s a good idea to keep some emergency funds in reserve at all times, even if it means having to cut back your retirement budget.
Comments
It really is a dilemma. You have this 401K.
Is it best to remove moneys at the end of a tax year? Or at the beginning of a tax year? Can you remove it 1 month at a time? or one payment at a time to place into your savings account? Supposedly, the 401k withdrawal automatically holds part of the removal as a credit for your next years taxs? It the amount withdrawn automatically taxed 15% no matter what your entire tax bill comes to on your annual taxs?
or is your tax bill factored into your regular return? All of the information on news and internet is geared on how to save and grow the 401k, not on how to remove the money! Most of the lessons in life are learned by actually doing the act, then learning or suffering from the consequencies. Its hard to teach people about the stock market--If you invest $2,000.00 you will learn quickly how the market works. Do I have to learn about removing my 401k moneys the same way????? Why is there not more info around about the how and when it is best to withdraw 401k moneys???????????????
Appears people actually feel it is bad business to cash in, rather than to save more?????????????? The 401k should be simpler for the over 65 person to know all the ins and outs about how to remove money to their advantage. All most people know is there is 15% due when you take it as income! This is a real dilemma . I know I have to take 10% each year after age 70 or pay a penalty! So, DUH!! I am 65 and may need to buy Christmas stamps next year. What are my cheapest taxable options with the 401k????? I am a small potatoes guy who likes to explore all the avenues before I act.
I cannot find the person who made the comment today on the Business Report, but I feel it necessary to respond to a stupid, uniformed comment by that person. She observed that the people who are stuck with withdrawing a sum of money from their IRAs based on last year's total, should not be given any break on the taxes incurred. She clearly has not thought this through or perhaps is not capable of it. She said those people making withdrawals at the end of year do so, because they did not need it earlier. Like many others, I make my mandatory withdrawal at the end of the year so that I can get the full benefit of growth. I then use the money withdrawn to live on for the coming year. My IRA has shrunk 40% since Dec. 31, 2007, but I still have to pay taxes on the full amount withdrawn based on what the IRA was worth 12 months ago. That women is brainless. Who said I didn't make a withdrawal because I didn't need it? This is a good example of why I no longer take the advice of so-called finanial advisors. The advice they give (including hers)is, in the words of a former United States vice president, "not worth a bucket of warm spit."
I cannot find the person who made the comment today on the Business Report, but I feel it necessary to respond to a stupid, uniformed comment by that person. She observed that the people who are stuck with withdrawing a sum of money from their IRAs based on last year's total, should not be given any break on the taxes incurred. She clearly has not thought this through or perhaps is not capable of it. She said those people making withdrawals at the end of year do so, because they did not need it earlier. Like many others, I make my mandatory withdrawal at the end of the year so that I can get the full benefit of growth. I then use the money withdrawn to live on for the coming year. My IRA has shrunk 40% since Dec. 31, 2007, but I still have to pay taxes on the full amount withdrawn based on what the IRA was worth 12 months ago. That women is brainless. Who said I didn't make a withdrawal because I didn't need it? This is a good example of why I no longer take the advice of so-called finanial advisors. The advice they give (including hers)is, in the words of a former United States vice president, "not worth a bucket of warm spit."