A new survey from New York Life shows that retirees and pre-retirees are more savvy about spending down their savings than they were a decade ago, with more than twice as many today saying that annual withdrawals should be held to less than 5% of one’s nest egg to avoid prematurely depleting it. But despite the improvement, far too many people still don’t have a clue about the right way to draw down their savings.
When New York Life asked retirees and pre-retirees in their 40s or older back in 2006 how much they could withdraw from their nest egg each year if they wanted it to last a lifetime, only 10% correctly answered that they should limit their withdrawal rate to less than 5%. Flash forward 10 years. When the same insurer put the same question to the same age group today, more than twice as many—23%—gave the correct answer. Progress? Sure, except that still leaves 77% who either overestimated how much they could withdraw or simply didn’t know.
In a way, this isn’t surprising. After all, estimating a sustainable level of withdrawals can be a challenge. Even the one withdrawal standard that’s gained some popular recognition—the 4% rule—has come under heightened scrutiny lately, with many retirement experts saying that it may be too highgiven today’s low yields and anemic projected returns.
Given the large number of factors that come into play—investment performance, your asset allocation, how long you might live, etc.—no withdrawal rate or system for spending down your nest egg can guarantee success. But it is possible to develop an approach that can improve your odds of tapping your savings for the income you need without incurring too high a risk of outliving your dough. Here are three tips that can help you do that:
1. Think beyond a “safe” withdrawal rate.
When it comes to spending down their nest egg, most people concentrate on how much they can safely withdraw from their nest egg without running through their savings too soon. Which is understandable. No one wants to spend their dotage with little or no money left in their retirement accounts.
But this emphasis on not outliving one’s savings can have a significant downside. Being overly cautious about withdrawals could force you to dramatically downsize your lifestyle. And if the financial markets perform well over the course of your retirement, the value of your investments could surge, leaving you with a big pile of savings late in life. That might not seem like much of a concern, except that it could mean that you lived more frugally than was necessary during the early years of your retirement, when you could have spent more on travel, entertainment or just living larger and enjoying life more.
So rather than trying to identify a “safe” withdrawal rate, I recommend you focus instead on finding a reasonable withdrawal rate that gives you adequate assurance that your savings will last but doesn’t require you to unnecessarily scale back your standard of living.
Reasonable people can disagree on what such a reasonable withdrawal rate should be, but I’d say that somewhere around 3% to 4% of savings is generally a good starting point, assuming you want your nest egg to last at least 30 years. You can stick to the lower end of that range (or even dip below it) if you want greater assurance you won’t outlive your savings, although doing so would mean having to get by on less income. Conversely, if you’re not as worried about prematurely depleting your nest egg (or you have other resources you can fall back on if you do), then you may want to start at the upper end of that range (or even exceed it).