Financial Aide
A
Withdrawal Strategy That Won't Leave You Empty
When you're working,
you probably focus on how much you're putting in to your
investment portfolio. But when you retire, how much you take out
will be a matter of considerable interest. And that's why you have
to prepare the proper withdrawal strategies.
Specifically, once
you retire, you'll need to decide what percentage of your investment
portfolio you can withdraw each year without running out of money.
There's no one right answer for everyone. However, when you're
considering a suitable withdrawal rate, you'll need to consider a
few different factors – one of which is your age at retirement.
Given today's longer life expectancies, you could easily be around,
and incurring a wide variety of expenses, when you are 90 or older.
Consequently, the younger you are when you retire, the lower your
annual withdrawal rate should be.
But, when determining your ideal withdrawal rate, it isn't just the
number of years that you need to consider – it's also what's
happening to your purchasing power during those years. Even with a
relatively mild annual inflation rate of three percent, it would
take just 25 years for the cost of living to essentially double. So,
if you need, say, $75,000 per year to cover your expenses when you
retire, you’ll need $150,000 per year in 25 years. If we go through
a period in which inflation rises significantly, you might have to
scale back your annual withdrawals or adjust your investment
portfolio to provide more opportunities for growth.
And, speaking of your investment mix, it's also a key factor in
determining your annual withdrawal rate. If you own mostly
fixed-rate investments, such as bonds and CDs, you’ll probably have
to take smaller withdrawals each year than you would if your
portfolio contained a greater percentage of stocks. That's because
stocks, over time, have more growth potential than other types of
investments – and you will need this growth to combat the two
threats to your retirement income described above: longevity and
inflation. (Of course, stocks also carry the risk of losing some, or
all, of your principal, but if you invest in an array of quality
stocks and hold them for the long term, you may be able to help
reduce the effects of price volatility.)
Another factor behind your annual withdrawal rate is the amount of
income you can expect from other sources. If you open a small
business or do some consulting, you may be able to withdraw less
from your investment portfolio than if you had no earned income
during your retirement. You also may be able to make lower annual
withdrawals if you've built up a sizable pension or 401(k),
supplemented by your monthly Social Security.
Your financial
advisor can help you develop a withdrawal strategy suitable for your
individual needs and that can counter the effects of inflation,
longevity and market volatility. By making the right moves at the
right time, you can go a long way working toward the retirement
lifestyle you've envisioned.
From
Edward Jones®
Alice O’Berry, Swansboro & Pat Rauhauser, Morehead City
Read more articles in the May print edition of Island Review.
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