You'll often hear that it's a bad idea to plan to retire on Social Security alone. Those benefits will only replace about 40% of your pre-retirement paycheck if you're an average earner. And that's only if cuts aren't implemented, which is a possibility.
Most seniors need roughly twice that much income to manage their expenses well, and that's where personal savings come in. Ideally, you'll manage to enter retirement with a nice IRA or 401(k) plan balance.
But just as it's important to build savings for retirement, it's also important to manage your savings wisely. That means coming up with a solid withdrawal strategy before the time comes to start tapping your nest egg.
The 4% rule no longer applies
A recent Edward Jones survey found that 16% of current retirees and 22% of pre-retirees are challenged by the idea of having to develop a strategy for retirement plan withdrawals. And a big reason could boil down to bad information.
For years, financial experts have stood behind the 4% rule, which has you withdrawing 4% of your savings balance during your first year of retirement and then adjusting subsequent withdrawals for inflation. Based on different factors, 4% was said to be a withdrawal rate that could easily allow a nest egg to last for 30 years.
But some of those factors have changed. When the rule was established, for example, bond interest rates were higher than they are now, so a bond-heavy portfolio was able to generate more income. Because that's not the case at present, a 4% withdrawal rate is likely to be too aggressive for the typical senior.
As such, the 4% rule is one you may want to write off and replace with a more updated version — perhaps 2% or 3%, depending on your needs and circumstances. If you're retiring on the earlier side, it could pay to stick to a safer withdrawal rate so your money lasts. If you're planning to extend your career, you may be just fine to stick to the higher end of that range. But all told, if you go with a 4% withdrawal rate, you might end up depleting your nest egg sooner than you'd like to.
Think through your options now
Some people don't start to develop a withdrawal strategy for their savings until they're in retirement. A better bet is to tackle that task before your career wraps up as it might inform some of your long-term decisions.
If you'll only be taking 2% from your nest egg each year, it means you may want to plan on retiring in a less expensive part of the country. That's the sort of thing it would be helpful to know ahead of retirement. Similarly, you may need to make plans to work part-time in retirement if you can't get as much money out of your nest egg as expected.
All told, the last thing you want is for your hard-earned savings to get whittled down too quickly. The more thought you put into a withdrawal strategy while you're still working, the less likely that is to happen.
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