Busted: The 5% Myth
When you retire, you’ll likely have a nice amount of money saved up — possibly even more than you thought you’d have. So withdrawing a small amount, such as five percent or even a little more, each year to help cover your expenses during retirement won’t add up to much, right?
One of your biggest retirement risks is outliving your savings. In fact, most retirees should plan on living 20 or 30 years (or even longer) in retirement. That’s why you have to be very careful not to draw too much money from your savings each year.
In the past, most experts have generally recommended annual withdrawal rates in the neighborhood of four or even five percent. However, in light of low savings rates and reduced investment returns, an increasing number of financial planners are recommending even lower withdrawal rates in the 3 to 3.5 percent range.
If this is news to you, you’re not alone. In fact, more than half of retirees surveyed in the Principal Financial Well-Being Index don’t understand the impact of spending rates on their savings. As a result, they would likely spend their money too quickly.*
Your best bet? Work with a financial professional each year during retirement to calculate an appropriate withdrawal rate. He or she can look at your unique situation — including your savings level, expenses, retirement goals, and so on — to help you determine the withdrawal rate that’s right for you.
Joe Moklebust will tackle the next myth-busting post. He’ll discuss expenses during retirement and why they may be higher than you think.
See our previous Mythbusters posts on:
* Principal Financial Well-Being Index, First Quarter 2011
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