7 Replies Latest reply on Aug 29, 2009 5:01 PM by jkom51

    Annual % savings in retirement

    brodewd1
      I just joined and find this stuff very interesting since it's been on my mind for awhile now. I have seen alot of advisors recommending you plan to only spend 4 or 5 per cent of your savings annually in retirement to make it last the rest of your life. Does this seem low or high or about right to you all? Does anyone have any real data to give us an idea of what percentage of their savings they really spend annually in retirement? Thanks.
        • Re: Annual % savings in retirement
          StocJock

          No simple answers.  Depends on many factors: 

          Do you want to leave $ to family or charity? What is your risk tolerance? What will your expenses be like? 

          Any kind of plan should be considered only as a general guideline, not a firm commitment.  You also need to constantly do a "gut check" to see how it feels to you.  You need to become educated on issues of asset allocation (stocks vs bonds vs cash) in terms of potential returns and associated risk.  Within categories of stocks and bonds, you need more education about additional ways to control risk and maximize returns.  You need to become educated on "packaged products" that are constantly being sold to seniors - many inappropriately.  You need to become educated on taxation issues, particularly as they impact retirement accounts, social security, and how assets are held (trusts, etc.).  You need to become educated about how those who offer financial advice are paid.  Just a few of many issues.  Good luck.

          • Re: Annual % savings in retirement
            jkom51

            Advice from financial planners has changed because of the changes in the market as well as the striking increase in longevity. The two very successful independent CFPs I know (one I worked for, for about 18 mos) recommend 4% or less annual distributions. This allows your principal to stand a better chance of getting through down markets yet still permit you to increase your distributions by the amount of yearly inflation.

            Also, it's now acknowledged that when you start distributions is as important as how much you withdraw. Starting in a down market increases your chances of running out of money at the end of your life.

            Back in the 'bull market' days, it wasn't unusual for retirees to take 6-10% of their portfolio annually. But as events have shown, you may not be able to weather a serious downturn yet still maintain the same lifestyle.

            My MIL's portfolio fell by almost $200K despite a conservative allocation. However, even at her reduced portfolio I have her only taking a 3.2% distribution. She is 81 and in good health (and lives with us); taking more would be risky as it's almost certain she'll live long enough to need nursing home care. For her situation, taking the minimum IRA distribution along with a modest portfolio withdrawal ensures she should have sufficient funds to last another 25 years - which is highly likely, in her case, that she will live that long. She has Social Security plus a pension.

            In our case, DH has a pension equal to 82% of salary. Opting for survivorship assignment (me) subtracts about 12% from that. To make up the 30% reduction, we can draw a 4% distribution from the portfolio that will bridge the difference. Again, I'm comfortable with that withdrawal percentage as adequate to protect the principal.

            HTH!

              • Re: Annual % savings in retirement
                brodewd1
                Thanks for your response. That is exactly the kind of real world experience I was asking for, and sheds a practical light of probable expenditures after retirement. I also took about a 200k hit in the recent catastrophe, as many others have done, and so the question of what is a resonable amount to expect to withdraw per year is a very pertinent and real near and long term question. The very real prospect of running out of money in our final years is sobering.
                  • Re: Annual % savings in retirement
                    stagehand
                    I want to second the comment about "do you want to leave an inheritance?" I gave my mother "permission" to "die broke", although she's not that short of funding for her retirement. But because (?) she remembers the Great Depression, and is thrifty anyway, she'd very reluctant to spend any principal at all.

                    Since her youngest child of 4 is 48 and has a good career, this is not as important as she thinks it is. If you read posts here and on the wide, wide, web, you'll see that there is an unspoken thought when people ask the "safe withdrawal" question you did. They're not just asking whether they'll run out of money before they die, they're asking "how can I die with the same assets I have now." That's not always the right question.

                    Many posts I read about "income investing" and "retirement income streams" involve confusion over the idea of selling a tiny portion of appreciated (let's say ...) equity investments to reap that appreciation. If you have an investment that has gone up 10% in five years, and you spend 2% (or probably, even 3%) of that account over each of five more years, you can't be said to have spent principal. Yes, you ate into your "savings" but that's what savings are for when you are old!

                    Tim
                    • Re: Annual % savings in retirement
                      jkom51

                      Very often, this is where insurance products can mitigate risk. I try to emphasize to people the lesson I learned working as an admin asst. for a major life insurer decades ago - you aren't looking for risk ELIMINATION, because there's risk in everything - it's just a matter of what degree of risk. You are after risk MITIGATION, a lowering of risk. Just as bonds are usually safer than stocks, but thus return less profit, it's up to you to identify where your biggest risk factors are in terms of your finances. Once you identify those, you can figure out if it's cost effective for you to try to lessen that risk.

                      For instance, many friends ask us why we bought LTC insurance so early (in our late 40's). We have no children, and few family members nearby. Even 15 yrs ago we knew that we wouldn't have sufficient savings in case something bad happened to one of us. So we got the insurance because it would prevent the other spouse from being forced to sell the house (like most, one of our major assets) to raise additional cash. It will pay for most, not all, expenses should something happen. Because we bought it at a younger age it's relatively cheap risk mitigation. Totaling up the premiums we've paid still wouldn't even cover six months of good-quality nursing home care - whereas having to personally pay for a year's worth of licensed facility care would be devastating to the other spouse's assets.

                      We have looked into senior housing in our area and on average, a studio apt with at least one meal a day is running about $1500/mo. This is not assisted living, but only for independent seniors. Although neither my MIL nor us need this yet, I checked some places out because it's impossible to plan when you don't know what you're planning for, LOL. So obviously, being able to afford this means some budget planning, if we want to move either her or ourselves into such a facility in the future.

                      Yes, living at home is cheaper, especially if the mortgage is paid off. But sooner or later, it becomes increasingly difficult to manage and maintain a home - in fact, we bought our house from two elderly sisters who had let it become rundown, being gradually unable to keep everything up. And especially our home, which is not handicap-accessible and would cost far too much to modify. I realized this when I broke my leg in a fall in the garden - it was four months of sleeping on the LR sofa! So we've already "faced the reality" - sooner or later, we will sell this home and get on with another phase of our life.

                      I think that rehearsing various financial scenarios in one's mind really helps. This is something that's very hard for my MIL to do - she was happy in her home, thought she would always own it (and die in it), then leave it to my DH to inherit. She still yearns for her old neighborhood and refuses to mentally adjust to making friends in our neighborhood. It never occurred to her to think about the future, or she would have realized that sooner or later she was going to have to move out of her home, because she was house-rich and cash-poor. She didn't have enough liquidity to maintain that house properly, let alone take care of her elderly years.

                      My DH and I discuss alternative future scenarios on a regular basis. We can't tell what the future is going to bring, especially with MIL living with us, but we do try to plan so that we have the best possible options available. I think that's all one really can do! Best of luck to you going forward.

                        • Re: Annual % savings in retirement
                          Ursa
                          You are lucky that the premiums for your  LTC insurance haven't increased. We bought LTC in our early fifties and, because the industry was in its infancy, have insurance for nursing home care only.  If we had bought later we would have provided for home care as well.  Anyway the premiums recently took a big jump.  Obviously we don't want to let it run out now after paying into it for more than twenty years, so we are just stuck.  The company couldn't by contract raise individual premiums, so they raised them for the whole class that bought insurance in those years!  The contract had no time limits on nursing home care, so I guess people were just living too long for it to continue to be profitable.  I would do almost anything to avoid a nursing home.
                            • Re: Annual % savings in retirement
                              jkom51

                              Actually, we fully expect and have planned for, premium increases in our LTC insurance. We did have one increase but it wasn't anything we couldn't handle. I understand Met Life no longer even offers the unlimited payout period which both you and we have. Life expectancy has increased so fast, so quickly, that actuarial figures are slow to catch up (statistically, one always looks at a 20 yr period, no less than 10 yrs minimum, to get valid data on which to base future estimates).

                              That's another reason why it's much safer to assume a 3-4% drawdown of assets in retirement. The fastest growing age group in the US is people over 80 years old!