As you retire, there are variables you can’t
control; investment performance and fate are certainly toward the top of the
list. Your approach to withdrawing and preserving your retirement savings,
however, may give you more control over your financial life.

Drawing retirement income without draining your
savings is a challenge, and the response to it varies per individual. Today’s
retirees will likely need to be more flexible and look at different withdrawal
methods and tax and lifestyle factors.


Should you go by the 4% rule?

For decades, retirees were cautioned to withdraw no more than 4% of their retirement
balances annually (adjusted north for inflation as the years went by). This
“rule” still has merit (although sometimes the percentage must be increased out
of necessity). T. Rowe Price has estimated that someone retiring with a typical
60%/40% stock/bond ratio in their portfolio has just a 13% chance of depleting
retirement assets across 30 years if he or she abides by the 4% rule. A 7%
initial withdrawal rate invites an 81% chance of outliving your retirement
assets in 30 years.1
That sounds like a pretty good argument for the 4% rule in itself. However, while
the 4% rule regulates your withdrawals, it doesn’t regulate portfolio
performance. If the markets don’t do well, your portfolio may earn less than
4%, and if your investments repeatedly can’t make back the equivalent of what
you withdraw, you will risk depleting your nest egg over time.
Or perhaps the portfolio percentage method? Some retirees elect to withdraw X% of their
portfolio in a year, adjusting the percentage based on how well or poorly their
investments perform. As this can produce greatly varying annual income even
with responsive adjustments, some retirees take a second step and set upper and
lower limits on the dollar amount they withdraw annually. This approach is more
flexible than the 4% rule, and in theory you will never outlive your money.
Or maybe the spending floor approach? That’s
another approach that has its fans. You estimate the amount of money you will
need to spend in a year and then arrange your portfolio to generate it. This
implies a laddered income strategy, with the portfolio heavily weighted towards
bonds and away from stocks. This is a more conservative approach than the two
methods above: with a low equity allocation in your portfolio, only a minority
of those assets are exposed to stock market volatility, and yet they can still
capture some upside with a foot in the market.
Attention has to be paid to tax efficiency. Many
people have amassed sizable retirement savings, yet give little thought as to
the order of their withdrawals. Generally speaking, there is wisdom in taking
money out of taxable accounts first, then tax-deferred accounts and lastly tax-exempt
accounts. This withdrawal order gives the assets in the tax-deferred and
tax-exempt accounts some additional time to grow. A smartly conceived
withdrawal sequence may help your retirement savings to last several years
longer than they would in its absence.2
Keeping healthy might help you save more in two ways. Increasingly,
people want to work until age 70, or longer. Many assume they can, but their
assumption may be flawed. The 2012 Retirement Confidence Survey from the
Employee Benefit Research Institute found that 50% of current retirees had left
the workforce earlier than they planned, with personal or spousal health
concerns a major factor.3
When you eat right, exercise consistently and see
a doctor regularly, you may be bolstering your earning potential as well as
your constitution. Health problems can hurt your income stream and reduce your chances
to get a job, and medical treatments can eat up time that you could use in
other ways. Good health can mean fewer ER visits, fewer treatments and fewer
hospital stays, all saving you money that might otherwise come out of your
retirement fund.
Fidelity figures that a couple retiring now at age
65 will spend $240,000 (in 2012 dollars) on retirement health expenses across
their remaining years. That $240,000 doesn’t even include dental,
over-the-counter drug and long term care costs (and as a reminder, many eye,
ear and dental care costs are not even covered under Medicare or by Medigap
policies). Every year you work may mean another year of health insurance
coverage as well as income.4

Reeve Conover can be reached at 877-423-9990 or


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