The biggest anxiety for a retiree comes from the fear of running out of money after you stop working. It is important to have a well thought out plan for taking distributions from savings and social security to make sure you are covered.
Knowing Your Limits
There is a simple 4% rule that can form the basis of how much you can safely withdraw from your savings each year after you retire. The rule stipulates that each year you can withdraw 4% of your portfolio value for your expenses. The goal is to provide a steady income stream without depleting your retirement savings.
Life expectancy and health conditions may reduce the amount you can withdraw each year. You may need your savings to last longer if your life expectancy is more than most. Medical conditions may also require you to dip into your savings.
Impact of Economic Conditions
If your portfolio value dips significantly the 4% limit will not provide you with enough money in retirement. Imagine your initial portfolio is $500,00. Using the 4% rule you will be able to withdraw $20,000 each year from your portfolio for your living expenses. Now let us say due to a deep bear market, your portfolio value dips to $300,000. Using the same 4% rule you will be able to withdraw only $12,000 that year from your portfolio to meet your living expenses.
To avoid this situation, it is especially important to hedge your portfolio using the ideas shared in the Portfolio Hedging blog. This will prevent your savings from falling significantly thereby impacting your retirement lifestyle.
Social Security
Social Security is an important component of a retiree’s income stream. While you can claim Social Security when you turn 62, it is best if you wait longer to start claiming it. Your social security benefits go up by approximately 8% each year you wait. It is hard to consistently grow your investments by 8% each year in the stock market. So, it is financially prudent to use your retirement savings first before claiming social security. By waiting you are implicitly growing your savings by 8% each year, without taking any risk!
Minimizing Taxes
If you have savings in tax deferred accounts like 401K, Roth IRA, Traditional IRA and others, it is important to sequence your withdrawals properly to minimize the impact of taxes.
While the complexity of taxes is beyond the scope of this blog, there is software available for planning your withdrawals efficiently.
Visit https://maxifiplanner.com/smarter-personal-financial-and-retirement-planning-software to learn more about this tool. It costs $99 in the first year and $79 each year thereafter. But it is well worth the money.