Retirement Withdrawal

Retirement savings and the rate of withdrawal

Is the 4 percent rule still valid?

Since the 1990s, the 4 percent rule of retirement withdrawal has been a guiding light in estimating whether investors will have enough money to last the rest of their lives. This rule states that you should withdraw no more than 4 percent from your retirement savings every year during retirement. But economic conditions and market volatility in recent years have called this rule into question.

The 4 percent rule was created with a particular mix of stocks and bonds in mind — 60 percent large-cap stocks and 40 percent intermediate-term bonds.* But today's market conditions, with historically low bond yields and a volatile stock market, may mean that this is not the optimal mix of stocks and bonds for all investors. Your asset allocation may differ, causing a rate of growth or amount of risk that is not consistent with a 4 percent rate of withdrawal.

How much income do you need?

It's also important to remember not everyone requires the same level of income in retirement. Required cash flow often depends on how expenses are managed in retirement. Goals of frequent travel or retiring in a city with a high cost of living will require a higher cash flow. Debts such as mortgage or car payments will also affect how much income you need in retirement.

To find the right rate of withdrawal you also must factor in the costs of taxes and inflation on your investments. For annual withdrawals of 4 percent you may need your retirement portfolio to earn returns closer to 7 percent or higher to cover these additional costs. Taxes can vary widely depending on many factors, including which state you retire in.

Boost retirement savings

The most important thing to remember, whether you follow the 4 percent rule or not, is that one of the best ways to ensure you don't outlive your retirement savings is to save more. Starting retirement savings early, increasing retirement contributions to reach annual limits on 401(k)s and IRAs, and considering other taxable accounts as part of your retirement strategy will help ensure that you're prepared. Ultimately how much money you have to take out during retirement will depend in part on how much you put in prior to retirement.

Look to Greater Texas and Aggieland Credit Union for sound direction toward achieving your retirement goals. Speak with one our investment advisor by calling 800-749-9732. Together we can help you find a retirement plan that fits your retirement goals and lifestyle.


*Source: The New York Times, May 14, 2013.

Please note that neither this financial institution nor any of its affiliates give tax or legal advice. Consult your tax advisor regarding your individual circumstances.

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