Fear of Running Out
According to the Employee Benefit Research Institute, 61 percent of those ages 44 to 75 say running out of money in retirement is their biggest fear.
A basic question in financial planning is: How much cash can I withdraw each year from savings (including an IRA, 401(k), brokerage account, etc.) in order to pay bills and not run out of money?
The answer is easy and straightforward. Almost all financial planners agree that a 4 percent to 4.5 percent withdrawal rate is “safe” and that your money will last 30 years or so if you maintain this withdrawal rate. This 4 percent to 4.5 percent withdrawal would increase each year for inflation so that you will have more money to spend each year as inflation takes its toll.
Let’s work through an example. Say you have saved $300,000, your portfolio averages a 5 percent rate of return, you think inflation is going to run 3 percent, and you feel comfortable with a 4.5 percent withdrawal rate. You can safely withdraw $13,500 ($300,000 times 4.5 percent) in year one, $13,905 in year two ($13,500 plus $405 inflation increase) and so on. The math works out so that in year 20 your withdrawal would be $24,383. Obviously your Social Security and other income sources would be in addition to this.
There is a lot of academic research behind the above example. The research is based upon historical performance of stocks and bonds. One factor that might scare you is that the research assumes that about half of your portfolio is invested in stocks.
Many retired folks I work with are not comfortable having 50 percent of their money in stocks. If this is your situation, you need to allocate less to stocks and set a lower withdrawal rate. Also, you need to accept that you will be spending principal as the years roll by and will not be leaving anything to your heirs. Or that you may outlive your money.
Making the 4 percent to 4.5 percent rule work for you is the hard part. Many people I work with want to spend more money between retirement and their mid- to late-70s They want to travel and enjoy this new season of life; they want to do things while they are healthy enough to enjoy them. I understand this and try to figure out ways to spend more in the early season of retirement and spend less in the later years. I have noticed that people spend less after age 80 or so. Also, people adjust their spending down as they age and their circumstances change.
I have also learned that life throws you many curveballs and you are not guaranteed anything. People die out of order. Health issues limit what many can do in retirement. World events will change life. So I never advocate that people live rigidly according to some withdrawal formula developed by a finance professor. Instead, take time to understand the math behind the formulas and develop a withdrawal strategy that works for you.
This column was featured in the August 7 Knoxville News-Sentinel. You can read it here: Many Fear They’ll Run Out of Money During Retirement
Meet the Author
Tom Coulter, CPA
Tom is the President and a founder of Meridian Trust. Tom graduated from The University of Tennessee, Knoxville, in accounting with honors, in 1978. Tom previously worked for the international accounting firm, Deloitte. He later joined the financial medical advising firm, FIS Associates, before founding Meridian Trust in 1997. Tom has worked extensively in retirement planning, taxation, estate and financial planning and investment management. He is a Certified Public Accountant, a member of the American Institute of CPAs (AICPA), and the Tennessee Society of CPAs (TSCPA).
Tom is also credentialed as a Personal Financial Specialist (PFS) by the AICPA.