When you retire, what percentage of your retirement savings (per year) do you think you can safely withdraw without outliving your money?
A) less than 5%
B ) 5 %
C) 6-9%
D) 10-15%
E) 16-24%
F) 25% or more
G) Don’t know
If you’re like most of my clients and I think it’s safe to say, most of the nation today, you probably answered “don’t know.” It’s a tough question, especially if you’re in the pre-retirement years where the emphasis is on accumulating retirement income, not worrying about how much of it you can safely withdraw. The problem, however, is that because most people aren’t giving this important question much consideration, they’re assuming rather naively, that they can withdraw huge percentages each year and still have enough money to live on, despite the fact that they don’t know how long they will live and what 
might happen in the world over the 20- to 30-year period in which they will not be working.
How much money can be safely withdrawn does depend to some degree on how much retirement income you will have available at the time you stop working. But in general, the best response to this quiz would have been “A, less than 5%,” the number most recommended by financial professionals.
A New York Life survey of 1,200 consumers has shown that 40 percent believe they can withdraw anywhere from 5 to 15 percent and still not outlive their money.
Surveys like these indicate that there is a growing number of people who are only dealing with half the “retirement equation.” Of course accumulation is important, but knowing how to use what you have accumulated wisely is also crucial. What’s more, it may be hard to get help trying to figure out how not to “outlive your money” when the New York Life survey indicates that many financial advisors don’t know how to help their clients best use their retirement money either. The study shows that 65 percent of advisors polled believe themselves to be very knowledgeable about helping clients create guaranteed retirement income sources, but 4 percent of brokers, agents, and planners polled didn’t know how much could safely be withdrawn and 26 percent of these financial “experts” believe that anywhere from 6 to 10 percent is a safe amount. Uncertainty about what will happen in the future helps breed fear which often leads to acceptance of a “standard” rule of thumb but even a pat 5 percent rule of thumb withdrawal rate, which is conservative, could be
unrealistic. Because you will have changing cash flow needs over time, you can’t just assume that you can carry that 5 percent withdrawal rate out for the next 30 years — you must plan for variables, and that can be hard to do.
Determining how to use retirement income requires ALL of the following:
- Determining realistic cash flow needs, not only in the short-term, but 30 years down the road.
- How much retirement income you will have amassed by the time you quit working.
- Family history in terms of health and longevity
- Plans for how you want to spend your retirement years; will you need more money for humanitarian travel, for example, than you would if you just stayed home and played with the grandkids?
Starting with a conservative withdrawal figure of less than 5 percent can be a good way to begin planning for how to use your retirement funds — after all, knowing that it’s probably not realistic to expect 10, 
15, or 20 percent withdrawals every year can be a good first step in the planning process.
Next, evaluate your estimated needs using forecasting calculators such as the Money Mastery Retirement Worksheet (contact me to get this tool at no cost: alan@moneymastery.com). Such tools can help you see how much money you would like to have each year to live on.
You will then want to take a look at your lifestyle and desired retirement goals. What does “retirement” mean to you? Does it just mean that you quit working at age 65, or does it represent something else? Travel, for instance, or part-time work mixed with volunteer service? Decide what it means for you and how much money you will need to make “retirement” as you envision it a possibility.
Additionally, you may want to look into programs that can provide a guaranteed monthly income stream at retirement such as life insurance or fixed annuities. Such programs transfer the management of your retirement funds to an insurance or annuities program, which then pays out a set amount of money per month, for life, transferring the responsibility for withdrawal management from you into a retirement payout program. Again, contact me with questions: (801) 292-1099, alan@moneymastery.com
