(Money Magazine) -- I want to do something different when I retire soon, but I'm not sure how much I can expect to draw each year from my $300,000 IRA. What's a reasonable amount? -- Richard, Logan, Kan.
It's easy to get a sense of how much you can pull from your IRA, or any other account, without a high risk of running through your dough too soon.
Just go to a tool like Vanguard's Retirement Nest Egg Calculator and plug in your balance, how long you want the money to last and how you've got you're your savings divvied up between stocks, bonds and cash. Then enter an estimate of how much you think you might want to withdraw annually. The calculator will show you the probability that you'll be able to draw that amount (adjusted for inflation to maintain purchasing power) over the period of time you've specified without your account running dry.
So, if you're 65, split your $300,000 IRA evenly between stocks and bonds and you want it to last at least to age 95 -- a reasonable assumption given life spans today -- you would have roughly a 75% chance of being able to withdraw 5% or $15,000, initially and then increase that amount by inflation each year, according to Vanguard's tool.
If you take out less, say, 4%, or $12,000, a year, the chance of being able to sustain those withdrawals to age 95 rises to about 90%. Withdraw more and the odds drop, to just over 50%, if you pull out 6%, or $18,000.
These are estimates, not guarantees. The longevity of your nest egg depends on how your investments fare, inflation and whether you make adjustments to your planned withdrawals.
But by trying out different withdrawal amounts, lengths of time you want your portfolio to last and how your money is invested, you can get a feel how quickly the odds of running out climb as you increase the withdrawal amount.
For this kind of exercise to be truly helpful, however, you need to also consider how much income you'll need to live the way you envision in retirement. That will give you a better sense of what trade offs you might need to make between living the post-career lifestyle you'd like with a level of financial security that's acceptable to you.
To do this assessment, get more specific than saying you'd like to do "something different." You'll want to engage in a bit of "lifestyle planning."
The idea is to come up with a detailed picture of how you want to live in retirement -- whether it's travel, taking up a new hobby or sport, spending part of the year in a different part of the country in a new vacation home or rental, whatever -- and then put numbers to this retirement vision. The numbers you come up with don't have to be accurate down to the penny. But the more precise you can be, the better gauge you'll have for how much annual income doing something different will require.
Once you have a handle on that, see how much of your spending will be covered by payments from Social Security, pensions and other sources, such as part-time work. If you're like most people, your needs are going to outstrip the income you'll have coming in from these sources, which means you'll be relying on your IRA to make up the difference.
That's when going back to that withdrawal calculator can really help. Plug in the amount of income you'll need from your IRA to fill the gap, and then take a look at the probability that you'll be able to draw that amount from your IRA throughout retirement. If the chances of your IRA sustaining your preferred level of spending are uncomfortably low, you've got to make some choices.
One might be to go ahead with an unsustainable level of withdrawals initially, figuring you can always scale back later. The rationale behind such a plan is that you're better off spending more early in retirement when you're more active and can enjoy yourself and paring outlays later when you'll probably be leading a more sedentary lifestyle. Just be aware that spending at a high rate today could require draconian cutbacks later on, especially if your IRA investments suffer a loss or earn anemic returns.
Another option is to revise your retirement vision, perhaps limiting your travel or taking on part-time work so you don't have to dip as deep into that IRA.
You could also consider devoting a portion of your IRA to an immediate annuity. This would give you more guaranteed lifetime income than Social Security alone will provide, and it would leave you in a better position to cover basic living expenses should your IRA start to run low sooner than you'd hoped.
However you decide to pull money from your IRA, make sure to revisit a tool like the Vanguard calculator every year or so to re-run the numbers with updated information. Depending on how much you actually wind up withdrawing from your account each year and how your investments perform, you may find that you have to pare back your planned withdrawals -- or, if you're fortunate, discover that you can splurge a bit.
Whatever the case, stay flexible. Adapting to changing conditions is just as important when spending your money in retirement as it was accumulating savings throughout your career.
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