“So you’ve been saving diligently for your Golden Years and are nearing the day you’ll join the ranks of retirees. The question is, how do you make sure that hard-earned pot of money lasts? The answer isn’t simple. With the possibility of living another 25 or 30 years after retiring, ensuring you don’t outlive your nest egg requires a lot of self-introspection and number-crunching.” That begins a superb column for cnbc.com by Sarah O’Brien, who continues: “For a couple of decades, the industry rule of thumb has been that a 4 percent annual withdrawal rate, adjusted yearly for inflation, provides the best chance of not outliving your savings.” Other excerpts from her piece:
“While some experts question whether 4 percent should remain the standard, T. Rowe Price recently released research confirming it remains a reasonable withdrawal rate.
“The study examined returns in a diversified portfolio of 60 percent stocks and 40 percent bonds over rolling 30-year periods starting in 1926. The results showed that an initial 4 percent withdrawal rate, adjusted for inflation, could be sustained for 30 years with a 90 percent chance of not outliving your savings.
“Financial advisors say that, whether 4 percent should be an assumed safe withdrawal rate or not, a person’s individual circumstances dictate how much they can afford to take out each year.
“To determine a rate appropriate for you, start by looking at all retirement income and expenses. On the income side, in addition to your retirement savings, is Social Security, which can affect the amount you need from your savings.
“While you can choose to receive your Social Security benefits before your full retirement age (as defined by Uncle Sam), doing so results in lower monthly payments and possibly more reliance on your savings.
“Conversely, delaying Social Security beyond full retirement age results in larger checks. But, caution advisors, waiting to take Social Security to let the amount continue increasing — it tops out at age 70 — won’t make sense for all retirees.
“If you’re lucky enough to be expecting a pension — about one-fifth of private-sector employees still get them — or any other kind of constant income stream, that also should be factored into the withdrawal rate of your savings.
“On the other side of the balance sheet are retirement expenses.
“Advisors say that in addition to everyday costs such as groceries and utilities, retirees often embark on activities they lacked time for before, such as extended travel and hobbies that come with new costs. The need for a big-ticket item — say, a new car — also likely will crop up.
“Additionally, one of the biggest variables to consider is your future health.
“The pain of health costs
“Strategies for mitigating health-care costs might include a supplemental insurance policy and long-term care insurance. Long-term care — generally defined as services provided to people with chronic conditions that impede their ability to perform everyday tasks — can run into the thousands per month.
“Advisors also caution against assuming you’ll spend less in retirement.
“Some costs might go down — commuting costs, housing expenses if you downsize — but everything else tends to remain the same.
“Also consider your legacy. If you want to leave money behind, it needs to be factored into your rate of withdrawal. Some retirees want to leave money for their children, others want to support charities, and still others couldn’t care less whether they leave anything behind.
“After identifying all income and expenses, you should factor in the anticipated growth rate of your investments.
“Another thing to keep in mind is that it is harder today to squeeze returns out of bonds, which historically have played a big role in retirees’ portfolios to mitigate risk.
“Yields on the benchmark 10-year U.S. Treasury note are hovering around 1.5 percent, compared to the historical average of more than 6 percent. But annual yields have not hit above even 5 percent since 2006. At the same time, inflation has generally remained low. As of the end of May, it stood at 1 percent.
“Of course, it’s impossible to predict with certainty what will happen with inflation or interest rates — or, frankly, anything. That’s why advisors emphasize the importance of being flexible with your retirement plan so you can adjust your withdrawal rate as necessary.”