As you plan for retirement, one of the biggest problems you face is how to make sure the money you saved lasts as long as you do. Nothing could be worse than seeing your retirement accounts empty during the later years of your retirement, when you will probably need the money the most. Set up your retirement plan and strategies early to make sure your retirement money lasts forever.
Assets and Your Budget
You have two sides to your financial retirement planning: money and budget. On the money side are the income amounts you receive from pensions, annuities and social security plus the retirement plan assets you have accumulated. On the budget side is how much money you need each year to fund your retirement lifestyle. The amount of income you need will increase each year with inflation. As you near retirement, you want to adjust your spending habits to stay within your expected income and determine how much money you need each year after Social Security and pensions.
Retirement Portfolio Considerations
Your retirement investment portfolio mostly will consist of tax-qualified retirement plans such as your 401(k) account and IRAs. Manage these plans to maintain the tax-deferred growth until you need to make withdrawals for your retirement income. Investment advisors such as Charles Schwab recommend balancing your portfolio between stocks and bonds. When you are in your 60s, the accounts could be as much as 60 percent in stocks. As you get older, you could shift to a higher percentage of bonds. You will always need a portion of stocks in your retirement portfolio to provide growth that stays equal to or ahead of inflation.
The 4 Percent Solution
To make sure you do not run out of money in retirement, plan to withdraw no more than 4 percent of your portfolio value, adjusting for inflation. Studies have shown a 4 percent withdrawal rate to start retirement, then increasing the amount each year for inflation, will allow -- in most cases -- for the value of the portfolio to last indefinitely. A study by Fidelity investments starting in 1972 shows with a 5 percent withdrawal rate on a portfolio of 50 percent stocks, 40 percent bonds and 10 percent cash, the portfolio ran out of money in 24 years. With a 4 percent withdrawal rate to start, the portfolio grew in value and had doubled by 2009.
No financial plan can predict and prepare for all possible market conditions. To avoid having to vary from your expected withdrawal amounts, set aside some liquid assets to use in an emergency or to invest in the market if stock prices drop significantly. If you can afford to withdraw less than 4 percent of your retirement money in the early years of your retirement, the account value will able to handle larger withdrawals in later years.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.