"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.
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