Making Good Choices About Funding Your Retirement

Presented by Fred Gaskin

Simply put, a successful retirement requires making a number of good decisions. Not surprisingly these decisions almost always require some form of compromise and involve trade-offs. This is certainly the case when it comes to determining how much you should be spending from your retirement, investment, and savings accounts. There are lots of different ways to approach spending strategies, but one of the methods many clients use to start the process is the 4% rule.

How the 4% rule works

The 4% rule is a simple, generic rule of thumb for calculating retirement withdrawals. It says you can withdraw 4% of your nest egg the first year of your retirement, then adjust that amount each year to account for inflation, with a high degree of confidence that your portfolio will last 30 years.

Here’s how it might work: Say you retire with a $1 million portfolio. In your first year of retirement, you would withdraw $40,000 ($1 million X .04). The next year, you’d withdraw $41,200 ($40,000 plus 3% for inflation), followed by $42,436 the year after that ($41,200 plus 3% for inflation). And so on.

Although investors and financial planners have used the 4% rule for decades, keep in mind it’s only a starting point. It relies on assumptions that may or may not apply to you or the environment in which you retire, including:

• Return estimates: The projections assume future returns will be on par with past returns.

• Portfolio allocation: The rule also assumes your portfolio will remain invested in 50% stocks and 50% bonds for the duration of your retirement, which is unrealistic—it’s likely to grow more conservative in your later years.

• Withdrawals: The biggest “problem” with the 4% rule is that is assumes your withdrawal plan will never change. It doesn’t account for changes in your spending needs, market conditions, or inflation.

Flexibility is key

Rather than adhere rigidly to a 4% withdrawal rate, it’s better to view the rule as a starting point. Once you have a rough dollar figure in mind, you can personalize it depending on your investments, risk tolerance, and life expectancy, while also staying flexible as conditions change. Here are three dynamic ways to manage your spending in retirement:

1. Develop a plan. Online retirement calculators (such as the one available at schwab.com/retirement-savings-calculator) can help you determine a sustainable portfolio withdrawal rate based on your specific situation. Likewise, a professionally created retirement plan can give you an even more detailed analysis. But whether you do the math yourself or work with a pro, review the numbers regularly to ensure you remain on track.

2. Adjust as needed. A static withdrawal rate doesn’t factor in the market’s inevitable ups and downs, nor does it account for health or lifestyle changes that demand flexible cash flow management. Taking a more dynamic approach might mean withdrawing a bit less (perhaps by skipping the inflation increase) in years when the market is struggling and withdrawing a bit more in years when the markets are on a roll. These types of moves may mean your budget fluctuates year to year, but they’ll also help increase the probability that your savings will last throughout your lifetime.

3. Consider an annuity. Annuities are one of the only types of financial vehicles that can ensure you have guaranteed income for life. With an ongoing stream of payments coming to you, you can feel more comfortable that you’ll have the income needed to cover essential expenses in retirement—even if you outlive your investment portfolio. However, annuities are not for everyone—they can be complex and costly, vary in flexibility. Annuity guarantees are subject to the claims-paying ability of the issuing company.

While not exhaustive, the above ideas should provide a constructive framework for investors to begin to consider their income sources of their retirement spending. Successful plans do not need to be complex or forever. Simple and flexible plans can make life a little bit easier, and the process of managing your retirement a little less confusing.

Fred Gaskin is the branch leader at the Charles Schwab Independent Branch in Bluffton. He has over 35 years of experience helping clients pursue their financial goals. Some content provided here has been compiled from previously published articles authored by various parties at Schwab.

This material is intended for general informational purposes only. This should not be considered an individualizedrecommendation or personalized investment advice. The securities, investment products and investment strategies mentioned may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decisions.

Annuities are long-term investment vehicles designed for retirement purposes. Withdrawals prior to age 59½ may be subject to a 10% Federal tax penalty in addition to applicable income taxes. Withdrawals from an annuity will reduce the account value. Withdrawals will also reduce the death benefit amount in direct proportion to the percentage by which the contract value was reduced. This can increase or decrease the amount deducted from the death benefit.

Investing involves risk, including loss of principal.

All expressions of opinion are subject to change without notice in reaction to shifting market, economic or political conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

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