A Safe Withdrawal Rate in Retirement
A recent program presented by the Probate and Trust Law Section of the Philadelphia Bar Association offered suggestions on a safe withdrawal rate from accumulated assets during retirement. After much analysis, the author concluded that 4% was probably a safe rate of withdrawal to ensure that retirees don't run out of assets during the rest of their lives. This is an important concept, and there are other points to consider. As I've written before, it makes sense to summarize what your expenses will be during retirement. This will include the basic items, like health care, utilities, etc., but also numbers for a little higher standard of living, such as more travel or other "deluxe" expenditures. When you have an idea of the basic and enhanced expenses you are likely to incur, consider what income you will have from Social Security and pensions. The remaining amount will be what you have to pay from your accumulated assets: retirement plan accounts, IRAs and other investments. If that remaining amount is 4% or less of your assets, you are likely in good shape for retirement. If it's 8%, you're in danger of running out of assets before you die. Of course, your expenditures may vary during your retirement years. In early retirement, you might do more traveling, and this will probably taper off in later years. You might have more medical expenditures in later years, which is why it's important to have good health insurance coverage in addition to Medicare, and perhaps a long term care policy as well. The key is to make a careful assessment of your expenses, and to decide what expenses can be deferred if they result in spending too high a percentage of your assets. This calculation will also affect your living arrangements in retirement: will you remain in your current, home, move to a nearby retirement community or move to a lower cost retirement haven? If you make that calculation of your expenses under various scenarios, and compare those expenses not covered by Social Security and pensions with your assets, you will know a lot about the quality of life you can enjoy during retirement.