Running out of money in retirement is a huge fear for many people. In fact, research from Allianz Life Insurance found that 63% of Americans are actually more worried about going broke too soon than they are about dying.
It’s understandable to be worried about this because, when you retire, you most likely have to rely on savings and Social Security, which, on average, replaces only 40% of pre-retirement income. If your savings runs out, you’ll be in trouble, and you don’t want to face this fate.
The worry is even more accurate for people in their late 50s and early 60s, who are entering the final stretch of their working years.
The good news is, you shouldn’t have to. No matter how modest your nest egg, and no matter how close you are to retirement, you can adopt a smart strategy for withdrawing your funds in a way that makes them last.
Here’s what you need to know to make that happen.
Choosing a safe withdrawal rate is the most important thing you can do to make your money last. This means you limit the amount you take out each year to ensure you leave enough in your account to continue earning returns and avoid dropping your principal balance too fast.
There are many different ways you can do that.
The most conservative option is to live on interest alone. If you have $1 million and earn 3% interest, you’d live on the $30,000 annual yield and not touch your actual nest egg.
The problem is, you don’t necessarily earn a consistent or substantial amount of interest every year since investment performance fluctuates. That’s on top of the obvious fact that if you aren’t planning to draw down the balance at all, you need to amass a pretty large balance to produce an annual sum that you could conceivably live on: having a million dollars at retirement is easier said than done.
And we haven’t even brought up inflation yet. Hence the second option, what is commonly called the 4% rule, according to which your money should last at least 30 years if you only take 4% out in Year 1 of retirement and increase the amount to keep pace with inflation.
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