Key Points
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Even if you retire with a decent chunk of savings, there’s no guarantee your nest egg won’t get depleted.
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It’s important to implement a safe withdrawal strategy.
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Being flexible during market declines is equally crucial.
As always, The Motley Fool cannot and does not provide personalized investing or financial advice. This information is for informational and educational purposes only and is not a substitute for professional financial advice. Always seek the guidance of a qualified financial advisor for any questions regarding your personal financial situation.
When you retire with little to no money saved, life can become immediately stressful. At that point, you may be mostly reliant on Social Security to cover your expenses. And even if you collect a decent-sized benefit, it may not be enough to cover your costs in full.
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On the other hand, if you retire with $1.5 million, you may be in a much stronger position to pay your expenses. But that doesn’t mean your financial worries automatically disappear.
A lot of seniors worry about depleting their retirement savings eventually. And unfortunately, having a larger IRA or 401(k) doesn’t make that risk go away. But with the right strategy, you can stretch a $1.5 million nest egg and get the peace of mind you deserve.
The right withdrawal rate is key
A lot of people go into retirement assuming they should use the 4% rule to manage their savings. That rule has you withdrawing 4% of your IRA or 401(k) your first year of retirement. From there, you adjust future withdrawals based on inflation.
With a $1.5 million IRA, using the 4% rule, your initial withdrawal would be $60,000. Then, if inflation rises 2% the following year, you’d remove $61,200 from your savings the following year.
The 4% rule isn’t necessarily bad advice, but it makes certain assumptions about your retirement timeline and investment mix that may not apply to you. So rather than follow it, you should come up with a safe withdrawal rate based on your personal needs.
If you’re retiring in your early 60s, your money might need to last longer than for someone retiring at 68 or 69. If you’re very risk-averse and only have 30% of your retirement portfolio in bonds, your assets may not generate enough income to support a 4% withdrawal rate.
It’s a good idea to work with a financial advisor to come up with the right withdrawal rate for you. The advisor may land on 4% after all’s said and done, and that’s OK, provided he or she has done the right calculations.
Prepare to be flexible
The 4% rule and similar approaches to managing a retirement nest egg have a key flaw — they don’t tell savers to reduce withdrawals during market downturns. And continuing to tap your savings during a major and prolonged market decline could put you at risk of running out of money sooner than you want to.
See, when you take withdrawals from your savings when your portfolio is down, you lock in permanent losses. Any stocks you sell to generate income can’t regain lost value as the market recovers if they’re no longer in your portfolio.
If you’re willing and able to reduce spending during market downturns, it helps preserve your portfolio. And if there’s only so much spending you can reduce, rather than tap your portfolio at the same rate, try to find other ways to get some of that money. That could mean working part-time temporarily until market conditions improve.
Always have a cash cushion
One final way to preserve a $1.5 million nest egg is to maintain a solid cash cushion. Doing so helps you avoid having to tap your savings at all if your portfolio has lost a lot of value.
Imagine there’s a market crash early on in retirement, and your portfolio value drops to $1.1 million. If you don’t give it a chance to recoup that missing $400,000, it changes the trajectory of your financial plan and puts your long-term security at risk.
That’s why it’s important to reserve some cash ahead of retirement. If you put one to three years’ worth of expenses into a high-yield savings account or CD ladder, you may be in a better position to withstand a steep market downturn early on.
In this example, let’s say it takes 2.5 years for your portfolio to retain the $400,000 it loses during an early market crash. If you have a 2.5-year cash cushion, you shouldn’t have to sell assets at a loss at all to get through that stretch.
Retiring with $1.5 million puts you in a strong financial position. But it doesn’t mean the risk of depleting your savings doesn’t exist. If you want to avoid that worst-case scenario, establish a withdrawal strategy that makes sense for you, adjust your spending as needed, and build cash reserves for added protection.
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