Knowing how much to withdraw in retirement is as important as planning how much to save.
Saving enough for adequate retirement income is a planning priority for savers. But many investors do not know how much they should withdraw in retirement. How fast those savings are drawn down can affect how long savings will last.
A 2014 American College Retirement Income Literacy Survey found that investors had a lack of understanding about fundamental income-planning concepts. A full 69% were unaware of a common principle that suggests retirees stick to a 4% withdrawal rate in retirement, and 16% of respondents thought it was safe to withdraw 8% annually in retirement.
The 4% rule, which originated in 1994 from published research on sustainable withdrawals in retirement, suggests that if savers withdraw roughly 4% each year, their money should last 30 years.
Having a conversation about retirement planning should include how to prepare for drawing down on one’s savings as well. Putnam’s investor education piece, “Withdrawing too much in retirement limits how long your savings last,” illustrates how long a hypothetical portfolio of 60% stocks, 30% bonds, and 10% cash would last under different withdrawal scenarios.
A financial advisor can help savers determine an optimal rate of withdrawal for their retirement plan. Planning for a sustainable retirement may also include a review of one’s portfolio and asset allocation. Investing too conservatively in retirement can limit how long savings will last. Conversely, investing too aggressively may expose you to “sequence of returns” risk, where a significant amount of negative returns that occurs in the early years of retirement can reduce the amount of income available to withdraw over your retirement. Resetting retirement goals and investments also provides an opportunity for advisors to talk about other strategies, including account consolidation, Roth IRA conversations, IRA rollovers, and tax diversification.