Safe Withdrawal Rates
Withdrawing the right amount of money from savings and retirement accounts is one of the most important retirement planning criteria that needs to be addressed. Take too much and you break your piggy bank. Take too little and you leave some lifestyle opportunities on the table. You need to get as close to the right amount as possible. This calculation is worth the effort. In fact, it is critically important to your financial security.
First you must take the Retirement Realty Check and ask yourself these questions:
- How will you save in Retirement? Better budgeting and investing with growth and tax efficiency in mind year after year.
- Could your cash flow be more important than your savings? While the #1 retirement fear is someday running out of money, your income stream may actually prove more important than your retirement nest egg. How great will the income stream be from your accumulative wealth?
- What will you begin doing in retirement? In the classic retirement dream, every day feels like a Saturday. Your reward for decades of work is 24/7 freedom. But might all that freedom leave you bored?
- Will your spouse (or equivalent) want to continue living the way that you live? Many couples retire with shared goals, but they find that their ambitions and day-to-day routines differ. Over time, this disconnect can be challenging.
- When should you (and your spouse) claim Social Security benefits? “As soon as possible” may or may not be the wisest answer. An analysis is needed!
Secondly, lets take a look at some major retirement planning mistakes:
- Leaving work too early. Some of us are forced to make this mistake. Roughly 40% of us retire earlier than we want to. About half of us apply for Social Security before full retirement age.
- Underestimating medical expenses. Based on Fidelity measurement statistics, a typical couple retiring at 65 today will need $240,000 to pay for their future health care costs (assuming one spouse lives to 82 and the other to 85). Prudent retirees explore ways to cover these costs.
- Taking the potential for longevity too lightly. If you are a man you have a 40% chance of dying at age 85; if you are a woman, a 53% chance. About 50% of people underestimate their projected life expectancy.
- Withholding too much each year. You may have heard of the “4% rule”, a popular guideline statistic that you should withdraw only about 4% of your retirement savings annually. Many cautious retirees try to abide by this guideline. So why do some retirees withdraw 7% or 8% per year? For the first phase of retirement (the go-go phase), people tend to live it up, more free time naturally promotes new ventures and adventures and an inclination to live a bit more lavishly.
- Ignoring tax efficiency and fees. It can be a good idea to have both taxable and tax advantaged accounts in retirement. Also, account fees must be watched.
- Avoiding market risks. Equity investments do invite risk, but the long-term rewards may be worth it.
- Retiring with big debts. It is difficult to preserve (or accumulate) wealth when you are handing checks to assorted creditors.
- Putting college costs ahead of retirement costs. There is no “Financial aid” program for retirement. There are no “retirement loans”. Your children have their whole financial lives ahead of them. Try to refrain from touching your home equity or your IRA to pay for their education expenses.
- Retiring with no plan or investment strategy. Too many people do this. An unplanned retirement may bring unplanned financial surprises. Retiring without an investment strategy leaves some people prone to market timing, day trading or market buy-sell decisions based on emotions instead of financial analysis.
These are some of the classic retirement planning mistakes. Why not plan to avoid them? Take a little time to review and refine your retirement strategy in the company of financial professionals you know and trust.