How Much Can I Take Out Of My Retirement Account Each Year?

Financial planners have a pretty simple way of thinking about your retirement savings: “accumulation” and “deccumulation.”

The first phase, accumulation, is where most people focus their energy as retirement investors. They try hard to put away set amounts from each paycheck or quarterly, and they worry about how to properly invest for growth over the decades.

The second part, deccumulation, gets a lot less attention. Yet it’s a crucial part of your retirement planning and deserves serious thought.

You can think of deccumulation as the rate at which you spend down your nest egg in retirement. The variables are:

• How much you have
• Your cost of living
• How much your investments will grow in retirement
• Unexpected costs
• Inflation

Understandably, that’s a lot of variables to consider, and it’s likely you won’t really know much of what you need to know until you decide to leave work.

One way to think about your spending in retirement is to consider the well-known “4% rule.” Developed by a financial planner, the rule states that you can take 4% of your retirement plan out each year and effectively never go broke for 30 years.

So, if you have $500,000 in a plan and decide to retire, you can take out $20,000 to spend in the first year.

The next year you adjust the amount by inflation and just keep going. The idea, broadly, is that your total account will grow by enough from investments over 12 months to compensate for the withdrawals.

You might find that your account is growing more quickly or more slowly and adjust as needed, but that’s why the rule is more of a guideline than an actual rule.

Cash flow

Be sure to take into account the likelihood that you will collect Social Security income as well at some point in your retirement. For many couples that creates another flow of income on the order of $3,000 a month, which means you would have $36,000 in addition to your expected retirement plan withdrawals.

This is why it’s vitally important to know your actual cost of living in retirement. Will you have a mortgage? Car payments? Travel expenses?

How much it costs you to maintain a home, pay for utilities and taxes, plus any debts you carry will affect your choices of how much to withdraw from your retirement accounts. The less you need to take out now, the more it will grow for the future.

Secondly, inflation can be a real concern. Over the long run the cost of goods services goes up, so your investments have to keep pace with that at a minimum or your purchasing power inevitably declines.

Finally, many retirees find it helpful to maintain a relatively large cash cushion. An unexpected expense — such as an emergency home repair or health problem — could force you to liquidate an investment you might otherwise want to keep.

It’s important to know all of the factors which could trigger spending and have them written down in a financial plan. The information you gather will help you make investment choices that serve your long-term goal, which is a peaceful, stress-free retirement.

MarketRiders, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.