"3% is the new safe withdrawal rate," Wade Pfau, professor, American College of Financial Services, Mryn Mawr, Pa.
BY JULIA ANDERSON
There are TWO long-standing rules that financial advisers have been giving people planning for retirement.
Rule No. 1 --- You can safely withdraw 4 percent of your nest egg retirement savings each year without running out of money in the long-run.
Rule No. 2 – When investing in retirement move out of riskier assets and into safer bonds as you age.
Here’s the problem for today’s retirees: Both Stocks and Bonds are EXPENSIVE by historical standards. We’ve enjoyed a long run-up in stock values. Meanwhile, bonds are vulnerable to declines because of rising interest rates.
THE NEW RULE --- 3 percent is the new 4 percent.
In other words, when planning retirement income consider withdrawing only 3 percent of your portfolio value each year instead of 4 percent.
"3 percent is a safer withdrawal rate," say the experts at the American College of Financial Services. A lower withdrawal rate means more money stays in your portfolio and continues to earn income to be reinvested for the long-term.
Let’s look at some numbers:
You have $1 million in retirement savings:
A 4 percent withdrawal rate = $40,000 a year.
A 3 percent withdrawal rate = $30,000 a year.
You have $500,000 in retirement savings:
4 percent = $20,000 a year
3 percent = $15,000 a year.
Can you live on $30,000 a year, plus your Social Security benefit? Many people are living on less. Can you live on $15,000 or $20,000 a year, plus Social Security?
Let’s talk, now, about how your nest egg is invested.
Conventional thinking has you starting your retirement with 60 percent of your nest egg in stocks, so your money keeps growing. As you age, you shift out of stocks and into bonds to reduce risk. But as we said earlier, with both stocks and bonds at expensive levels…with bonds vulnerable to interest rate increases, this formula might not work so well. What to do?
According to a report in the Wall Street Journal, the new thinking has retirees reducing stock exposure in the early years of retirement to protect against market declines, which are more likely at the end of this long bull market that we've enjoyed. Then gradually moving back into stocks as they age.
If a BEAR MARKET occurs in the early years of retirement, a stock-heavy portfolio might never recover, if you must sell stock at a depressed price during a downturn. In a bear market, bonds (even at today's higher values) will do better and offer less risk, the experts say.
TO REVIEW:When planning for retirement, make your income calculations based on a 3 percent withdrawal rate rather than the traditional 4 percent to allow more of your portfolio to grow and last longer.
Secondly, consider starting your retirement with more of your portfolio invested in safer bonds, rather than stocks, and gradually move into stocks as you age. The idea is to stretch your nest egg the estimated 28 years you may live in retirement.
If all of this scares, you to death, talk to a financial adviser about your retirement income options, read up on investment strategies for withdrawing from your nest egg.
Make sure you understand the underlying risks of bonds in an environment that has federal-bank regulated interest raising going up.
Remember that if you are in good health at age 65, you will likely live into your late-80s. And we all know people living into their 90s.
WHAT ABOUT PEOPLE WHO HAVE A LONG WAY TO GO UNTIL RETIREMENT?
The experts at the College of Financial Services recommend:
If you have 30 years until retirement, you should be saving 16 percent of your annual income in a tax-deferred account. That account should be invested in 60 percent stocks and 40 percent bonds.
If you have 40 years until retirement, you should be saving at least 8.8 percent a year with the same investment mix.
BOTTOM LINE: SAVE A LOT ($1 million at 3 percent equals $30,000 of income in retirement) and plan to spend carefully in retirement to avoid running short of money.
Meanwhile there are many strategies for how best to take money out of tax-deferred retirement funds. Study up on those strategies.
Be sure you understand all the options and their pluses and minuses. If you don’t understand something, ask questions until you do. Also, remember that the IRS requires that you withdraw from your tax-deferred IRA or 401(k) at age 70 1/2. The IRS withdrawal rate on your money is about 4 percent, whether you like it or not.
For MORE:"Why You Should Hire a Financial Planner, even if You're Not Rich," NY Times, click here.
"Forget the 4 % Rule, WSJ click here.
"How Much Can You Withdraw in Retirement?" - The Balance, click here.
"How can I Make my Savings Last?" - Fidelity, click here.
"How Much should you withdraw from your Retirement Savings each year? - Motley Fool, click here.
"You never really know a man until you have divorced him," Zsa Zsa Gabor, Actress and socialite. (1917-2016)
BY JULIA ANDERSONAt 54, she has been living apart from her husband for more than two years but has yet to initiate a divorce. “I’ve got to get this over,” she told me with a look of distress. “It’s just so hard to take the next steps.”
For her there are a lot of next steps: With a divorce can she continue to use his health insurance coverage? How does she negotiate a fair division of retirement savings assets? If he gets the house, what does she get? Does she have enough money saved to pay for a divorce attorney? I ached for her.
Divorce is horrible in so many ways…a personal failure, a loss, an emotional nightmare. For women, it also could be a financial disaster. Few women are better off financially after a divorce.
According to a report in The Atlantic, women typically see a 20 percent decline in income when their marriages end. The magazine called it “The Divorce Gap.”
One in five women fall into poverty after divorce. Why? They likely will have less income from a job (if they have one) than their ex-spouse and they typically have custody of the children. Meanwhile, few divorced mothers (only 25 percent) receive full child support as spelled out in their divorce agreements.
Advice for my divorcing friend:Get off the dime and get it done. The longer you dither the more time he has to find a new girlfriend, to decide he deserves more in a settlement or to hide money and assets.
Put together a post-divorce budget for yourself. Add up your living costs for food, utilities, mortgage/rent, insurance, transportation, retirement savings, health care. This gives you a negotiating position in a divorce settlement.
Gather all financial documents. Savings and checking accounts, retirement accounts. Get an appraisal on your home to determine how much equity is there. Cancel joint credit cards, immediately. His debt can be your debt and another negotiating tool in the divorce.
Open accounts in your own name – bank, credit cards, savings.
Determine how you will handle health insurance coverage, get your own or stay with his coverage.
For women who have been out of the workforce for a long time, consider short-term court-ordered rehabilitation alimony. The alimony will help cover retraining and job search costs. By the way, some jobs in demand require little training. Among them, phlebotomist, paralegal, certified nurses’ assistant.
Horde your money. Do you have enough savings to get you through the cost of a divorce? Do you have money to reestablish yourself afterward? Can your family help you?
If you can afford it, consider hiring a divorce team: therapist/counselor, divorce attorney and a Certified Divorce Financial Analyst who can help you set up a post-divorce budget and help negotiate the divorce.
Stay married, if you’re close to the 10-year anniversary. Waiting until you cross the 10-year mark makes you eligible to claim Social Security benefits on your ex-spouse’s work record with no impact on him.
Alimony and the Tax Reform Act Changes
The Tax Reform Act passed by Congress in 2017 made big changes to alimony tax rules. The OLD RULE: Recipients (98 percent women) had to report alimony payments as income and pay taxes on the money. The payer gets a tax deduction.
THE NEW LAW: The spouse receiving the alimony will NOT have to pay taxes on the income. But neither will the payer get to claim a tax deduction. Result: Tax savings for women, increased expense for men. This tax change became effective in 2019.
If you are at the beginning stages of a divorce, take time to do some research on what critical steps you should take. There’s plenty of info on line – see my list below.
Check out WIFE.org web site where founders Ginita Wall and Candace Bahr provide financial planning resources for women, particularly those divorcing or widowed.They also support Second Saturday workshops throughout the U.S. aimed at helping women through divorce and/or widowhood. Check for a workshop in your area by going to WIFE.org.
WIFE.org home page topics include How to Choose a Divorce Attorney, the Benefits of Being Married 10 Years, A Step-by-Step Guide to Preparing for Divorce and Life Events and Your Finances: Are You in the Know?
They also support Money Clubs for women throughout the country.
Bumper sticker at WIFE.org – “A Man is NOT a Financial Plan.”
For more:“How to Get Through Your Breakup and Create a New Life You Love,” by Suzanne Riss and Jill Sockwell.
“Divorce: Think Financially, not Emotionally. What Women need to know about security their financial future, before, during and after a divorce,” by Jeff Landers.
Divorce advice for women at www.WIFE.org.
Second Saturday Divorce Workshops, find a workshop through WIFE.org.
I meet women all the time who face job and money transitions and who want to do them right. It’s about building confidence and taking charge of the future. This is your money. No one cares more than you do!
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