Deciding how much to withdraw from retirement funds is a key consideration for retirees.
Many simply accept income from their bonds and dividend-paying stocks. However, their income falls when yields are low and retirees might lack enough to support their lifestyles and risk depleting their portfolios, according to Christine Benz, Morningstar's director of personal finance
To properly plan their retirement income and keep their nest eggs intact, retirees should consider these key questions, Benz advises.
First, do you want your withdrawal amount to be fixed, variable or a combination of the two?
Taking out a fixed dollar amount, starting with 4 percent the first year then adjusting the amount for inflation, is comfortably similar to a paycheck. But it's not sensitive to market fluctuations, Benz explains. You could take out too much in down years, leaving less to recover with.
If you withdraw a fixed percentage — commonly 4 percent a year - you probably won't run out of money, but you might not have enough to support your lifestyle in some years.
A hybrid method — and there are different versions — entails withdrawing a fixed dollar amount but not adjusting it for inflation in down years.
Another more complicated technique involves withdrawing a fixed percentage with upper and lower limits, or "guardrails." Although you're unlikely to run out of money, it's more complicated to understand and implement.
Where to invest your retirement funds is another key question. The traditional method of relying on dividends and bonds preserves principal and is easily understood. However, when yields are low retirees must tighten their belts or take their chances on higher-yielding, riskier securities.
In the total return method, retirees reinvest all dividends and capital gains and periodically rebalance their portfolios. It's more diversified than strictly income-producing portfolios, as it includes non-dividend-paying stocks and lower-yield bonds, but rebalancing proceeds might not always be enough for living expenses.
The hybrid method entails spending income and dividend distributions and using rebalancing proceeds to cover any income shortfalls. While more complicated, it improves the portfolio's risk/reward profile.
David Ning, founder of MoneyNing.com, agrees the conventional 4 percent withdrawal may not always be best. Spending your nest egg may be ill-advised if your balance drops, and you might want to invest more conservatively as you age, which can impact your portfolio's performance, Ning writes in an article for U.S. News & World Report
Performance of your investments and your spending needs is impossible to predict, he adds. Most people encounter unexpected medical or housing costs.
"The 4 percent rule requires that you follow a strict set of guidelines. But it can be more useful to remain flexible in retirement and take additional precautions to insure your savings will last the rest of your life," Ning writes. "Skipping a few inflation adjustments and adjusting your spending when costs go up can both do a lot to help your savings last longer."
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