If you are to learn more on retirement withdrawal strategies, then have a look here. In the United States, the average retirement age is set at 67 for men and 65 for women. This comes with making plans and putting away money for retirement. The foremost question on your mind will be how long will your retirement savings last? Alicia Parker, a senior citizen who recently retired, had such worries too and it inspired me to come up with this article.
Firsts of all, some factors determine the longevity of your retirement savings like;
Table of Contents
1. Cumulative Savings
Cumulative saving is a kind of saving that allows multiple deposits during a period. The money deposited is invested and the interest is accumulated to the overall balance. These savings are the same as compound interest.
“If you have a cent and doubled it throughout a month, at the end you’d have over $5 million, that’s cumulative savings,” says Frank Marshall, a financial planner from Van Alstyne, Texas. “Making a deposit into a savings account that gives 5% interest will yield massively after 20 years when you are ready to retire,” he says.
2. Monthly Spending
Your monthly spending is the amount spent in a month. It includes housing expenses, groceries, transportation, insurance, and utility bills. These expenses do not change at retirement and should be considered. The higher the expenses, the little your savings is will be. You should keep a budget and cut back on your spending. It’s one of the best retirement withdrawal strategies you can focus on the most.
3. Monthly Social Security
Social security benefits are government-sponsored benefits that partly replace your income at retirement. It is based on how much you earn during your working days, your age, and when you sign up for the benefit. This benefit is a plus to your savings and the amount you receive also determines your retirement saving.
4. Monthly Pension
Marshall defined pension as “the payment made to you regularly after retirement”. “Once you contribute to the scheme, the money contributed is invested and to increase in value,” he says. The earnings are then used to cater for you at retirement.
5. Other Income After Retirement
Since you won’t be getting salaries anymore, you must have found an alternative source of income – possibly a passive income – to fall back to. The earnings from this alternative source – if you have one – may influence your savings and help you build more savings for retirement.
6. Rate of Return
The return rate is the total profit or loss made in investment at a period. “For retirement, you need a good return rate of 6-7% to having a retirement saving,” Marshall said. “To keep your rate good, you need to stay longer on the investment,” he says. An example of such investment is the 401(K).
7. Rate of Inflation
The inflation rate can really do a number on your savings. “With a 3% inflation rate, the present value of your savings may not be worth so much in the next 10 to 15 years,” Frank said. Unless you have a plan that can outrun inflation or keep up with the pace, you may find yourself in crisis.
8. Marginal Tax Rate
The marginal tax rate is the amount paid as tax on every money earned. Although you are a retiree, you still get to pay tax on every dollar you earn. That fact cannot be ignored. “But your ax may be lower in comparison to your working days”.
9. How to Make Your Retirement Savings Last Longer?
Running out of money is one of the greatest fears for most retirees – like Alicia Parker who inspired this article – especially with the rate of inflation. While some are in good shape financially, others need all the pension, social security benefits, and investment earnings they can get to survive. Below are ways to stretch your retirement savings to make them last longer.
10. Minimize Your Expenses
To make your money last, cut your expenses down. Although there are basic things you cannot do without like housing and grocery, there are ways to cut back on it. For instance, you may consider moving from a sophisticated house to a more simple one with all the amenities to lower your rent. Slim fitting your expenditure will create room for more savings.
11. Consider a Fixed Annuity
Besides your monthly pension and social security benefits, there are other steady streams of guaranteed income, like an annuity. An annuity is a life insurance retirement plan where you receive a fixed amount on the earning you accumulated. It is similar to the 401(k) investment.
12. Maximize Your Social Security Benefits
You can make the most out of your social security benefits when you get them later in life. Since the benefit is determined by your age and years of earning, you may not want to get it early. When you start receiving the benefit early – at the entitled age of 62 – the amount you receive gets reduced as you advance in age. According to Marshall “wait till you truly need the benefit before signing up for it”, that’s later in life.
Have Other Income – Retirement Withdrawing Strategies
When depending solely on one resource, you stretch it too thin. When the tension gets to the threshold, it snaps in two, hence you need other income sources. “You should consider passive income ideas like applying the knowledge from your working days for tutoring and consulting”.
13. Develop a Withdrawing Strategy
Your spending strategy is a financial plan for withdrawing money from your investment without crippling it. It can be a static or dynamic strategy.
14. Static Withdrawing Strategy
This strategy is rigid. The percentage you withdraw annually does not change only the value changes. An example is the 4% rule.
4% rule is a research-based tool that allows a 4% withdrawal of your investment earning as adjusted by inflation. For instance, if 4% of your earnings the previous year was $40,000, with the 3% inflation rate, that value may reduce. For this year, you will also withdraw a 4% equivalent to today’s value. In other words, you 4% changes with inflation.
15. Dynamic Retirement Withdrawal Strategies
This strategy is flexible. The withdrawal rate changes in line with your investment returns. It depends on the market, not inflation. An example is the Guyton-Klinger Spending rules. These rules are to ensure that you don’t run out of money when the market is bad and more money is spent when the return rate is good.
A. Withdrawal Rule
The amount that is withdrawn each year increases except when there is a negative return or a return rate higher than the first withdrawal.
B. Capital Preservation Rule
Your yearly withdrawal is reduced by 10% if the withdrawal rate is above 20% of the first withdrawal.
C. Prosperity Rule
Your annual withdrawal is increased by 10% if the withdrawal rate is below 20% of the initial withdrawal. The aim is to help you keep your income intact. You don’t withdraw too much to deplete your investment or too low to reduce your lifestyle.
So you should replace up to 70% of your income and weigh your income against your expenditure for your retirement savings to last. We hope these retirement withdrawal strategies will help you pile up your savings.