A guide to drawing down your savings in retirement

Many advisors say it makes sense to expect that you’ll spend more in the first years of retirement — when you’re still mobile — and then assume expenses for things like travel will drop later in life.

Many advisors say it makes sense to expect that you’ll spend more in the first years of retirement — when you’re still mobile — and then assume expenses for things like travel will drop later in life.

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The approach of retirement should be an exciting time for 50- and 60-somethings. But when the issue is your finances — and whether you’ve saved enough to last the rest of your life — excitement can quickly be overridden by anxiety.

One of the first decisions retirees must make is how much of their savings to spend in the first years after leaving full-time work. And unfortunately for people now contemplating retirement, the math on tapping one’s nest egg has rarely looked so daunting.

It’s bad enough that many Americans have saved too little. But even those with substantial savings face the prospect of earning dismally low returns on stocks and bonds for years to come. That’s because U.S. stocks look pricey after a seven-year bull run, while yields on high-quality bonds remain in low-single-digits.


Worse for savers, hopes have dimmed that the Federal Reserve would aggressively push up short-term bank interest rates this year from near-zero levels. After a quarter-point rate hike in December the Fed has paused, and Chairwoman Janet L. Yellen said last week that global economic concerns dictated that the central bank should “proceed cautiously.”

All of this has raised fears among many retirees and pre-retirees about draining their savings pool much faster than it can grow, said Maria Bruno, a retirement-planning expert at mutual fund giant Vanguard Group in Valley Forge, Pa. “There’s a lot of panic over this,” she said.

That calls for careful planning both for people already retired and those approaching that red-letter day. By first establishing how much you can afford to take from savings each year, you can determine whether you’ll want to try to earn part-time income in retirement, take Social Security early or perhaps delay retiring altogether if possible.

What follows is a basic guide to drawing down your savings in retirement.

Use the “4% rule” as a benchmark. The 4% rule, based on early-1990s research, holds that a retiree with a balanced (stock-and-bond-mix) portfolio could safely pull out 4% in the first year of retirement — then that same dollar amount each subsequent year plus an inflation adjustment.

That was considered a safe formula because, based on historical market performance, withdrawals at the 4%-rule rate wouldn’t exhaust the portfolio even after 30 years.


The question now, however, is whether future market returns will be much lower than historical returns. Over the last 30 years, for example, long-term U.S. government bonds have posted an average annualized return of 8.3% a year, counting interest and appreciation, according to Morningstar Inc. But with 10-year Treasury notes now yielding about 1.8%, replicating that 30-year performance is virtually a mathematical impossibility.

If your retirement funds earn less than you assume, you’ll need to reduce withdrawals over time or risk running dry sooner.

Yet many financial advisors still are willing to begin the discussion at 4%, even if the final number is lower. “It’s still a reasonable starting point,” said Christine Benz, director of personal finance at Morningstar in Chicago.

A retiree with a $400,000 nest egg, then, would plan to take out a maximum of $16,000 the first year for living expenses.

Build a retirement financial plan around your withdrawal rate. Your savings are one source of income in retirement. For most people, Social Security is the other main source. (Your benefits are easy to calculate online.) If you’re willing and able to work part-time, that could be another cash generator.

Some people also can count on corporate pensions. Although they have been disappearing rapidly over the last 30 years, there still was $3.09 trillion in pension plans covering private-sector workers as of 2013. But that was dwarfed by the combined $11.56 trillion in 401(k)-style savings plans and individual retirement accounts.


Free online simulators can help you calculate future income. But because there are a lot of moving parts involved, it’s ideal to seek help from a professional financial advisor at this stage of your planning. If you’re worried an advisor might try to sell you stuff, go with a fee-only planner.

“This is important stuff,” Benz said. “So even if you’ve been a dedicated do-it-yourselfer until now, it helps to have another set of eyeballs on it.”

A key consideration is what kind of lifestyle you envision in retirement or semi-retirement.

Gary Noreen, who retired as a systems architect at Jet Propulsion Labs in 2010 and lives in Oxnard, said he drew inspiration early on from his parents, who successfully planned and saved for a comfortable retirement.


“They’re in their 90s now,” said Noreen, 62. “I asked myself, ‘If I live to 95, how much do I need to live like they do?’” That influenced his own aggressive investing well before he retired. “I saw that I could do it,” he said.

Your spending is a wild card. Just as you have flexibility in terms of when you draw income in retirement, you have flexibility in spending on everything that is nonessential.

Many advisors say it makes sense to expect that you’ll spend more in the first years of retirement — when you’re still mobile — and then assume expenses for things like travel will drop later in life.

“We break out the client’s life into different spans,” said Sandi Bragar, a principal at wealth management firm Aspiriant in San Francisco. Typically, she said, “we find spending will increase during the initial period of retirement.” Nervous clients may reject that idea, she said, “but it might be the right thing to do if they’re healthy” and want to enjoy life.

A survey by the Employee Benefit Research Institute early this year found that retirees are more likely to underestimate spending than overestimate it. A total of 38% of retirees in the survey said their expenses were higher than they expected, while 21% said they’ve spent less than expected.


Think about which accounts to tap first for retirement income, and realize that conventional wisdom might not apply to you.

Retirees usually are advised to spend down their taxable assets first (i.e., assets not held in tax-sheltered accounts), then their 401(k) and conventional IRA assets, and finally non-taxable Roth IRA accounts. They’re also often advised to defer taking Social Security for as long as possible, to get a bigger benefit.

But a different formula may be better for you, particularly when it comes to taxes. The goal, Benz notes, “is to stay in the lowest possible tax bracket” each year, and thereby make your entire asset pool last as long as possible. That could entail taking money annually out of each of your accounts, to engineer the least painful tax bite. Converting conventional IRAs to Roths also is a common strategy.

Likewise, some retirees calculate that they’re better off taking Social Security earlier than later. Noreen is taking his benefit now, he said, because “if I waited till 70 I would have to take money out of my IRAs in the meantime. This way I can leave it there to grow.” He’s betting he will earn more on his IRA investments than he would by waiting for a larger Social Security benefit.

The argument for waiting is that the higher Social Security payment becomes a kind longevity insurance if you outlive your money, maximizing your benefit.

Factor in the withdrawals Uncle Sam will force you to take. Retirees who have accumulated significant nest eggs must keep in mind the “required minimum distributions” they’ll face at age 701/2.


The government mandates that you begin drawing from conventional IRAs, 401(k) plans, 403(b) plans and similar tax-deferred programs once you turn 701/2. The minimum withdrawal each year is determined by average life expectancy as the IRS calculates it.

Every dollar you withdraw from these accounts is taxable. So retirees who have large nest eggs could face hefty federal and state tax bills the longer they wait to tap the money.

Fred Wallace, a 61-year-old retiree in Playa del Rey, expects to have pension income next year from his former employer, and Social Security income in three years. He’s already thinking ahead to the minimum withdrawals he’ll face later on his IRAs. “I’m very mindful of tax brackets,” he said. That may lead him to rethink how and when he’ll tap his various income options, he said.

Thinking about taxes is helpful in another way, Wallace said: You’ll realize that you won’t have as much to spend in the future as your gross savings suggest. After figuring federal and state tax, “It’s not worth what it seems,” he notes.

Consider annuities and reverse mortgages. Both of these income options historically have had poor reputations among financial advisors. That may be changing.

Annuities are insurance contracts that can guarantee you a specific amount of income every year for the rest of your life. You typically buy them by paying an insurer a lump sum upfront. Essentially, the insurer is betting that it can earn more on the payments it receives than it eventually pays out. If you die relatively young, for example, you might lose; it’s the risk you take.


The knock on annuities has long been their often high sales commissions and management fees. Even so, with millions of retirees at risk of running out of money before they die, “As much as I hate annuities, the reality is there may be a bigger place for them than we previously thought,” said Bob Klosterman, founder of White Oaks Wealth Advisors in Minneapolis.

Larry Siegel, research director at the CFA Research Institute Foundation in Charlottesville, Va., suggests a strategy that centers on buying a deferred annuity at age 65 that would begin paying you at 85. From 65 to 85, you’d live off the rest of your savings. By having the annuity in place at 85, you avoid the worst-case scenario of outliving your money.

The reverse-mortgage concept also is getting more attention as retirees face shortfalls in savings. A reverse mortgage allows a homeowner-retiree to stay in place and draw down equity in the home on a regular basis. The equity used is repaid when the home is sold, presumably after the owner’s death.

“I’ve become a big fan of these as a retirement-income tool,” said Wade Pfau, professor of retirement income at the American College of Financial Services in Bryn Mawr, Pa. But he said it’s imperative that homeowners do substantial comparison shopping. In his own research, Pfau said, he found reverse-mortgage upfront fees of as little as zero — and as much as $10,000.



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