From Gen Z to baby boomers, one of the darkest fears in retirement for workers is that they will outlive their money. So figuring out how much to withdraw from your retirement account each year for living expenses can be, well, scary. Get it wrong, and the consequences are bone-chilling.
But here’s the good news.
According to Morningstar. recommendation Newly retired people will be able to safely withdraw 4% of their retirement savings each year for the next 30 years without emptying their cash register, according to a paper published this week. This is the highest safe withdrawal rate since Morningstar began this study in 2021. Last year it was 3.8% and in 2021 it was 3.3%.
The researchers say the new withdrawal rates are based on a conservative retirement savings portfolio of 20% to 40% stocks, 10% cash, and the remainder in 30-year bonds.
read more: How much money do you need to retire?
Why are retirees getting raises this year?
“Rising bond yields make everything easier for retirees. It also helps explain why our highest safe withdrawal rates correspond to portfolios with just 20% to 40% equity.” , Christine Benz, director of personal finance at Morningstar and co-author of the study, told me.
Otherwise, you’ll end up investing a higher percentage of your retirement portfolio in stocks, which will mess up your calculations. According to the data, if you own 70% of your shares, the safe withdrawal rate drops to 3.8%.
In terms of numbers
This year’s study found that the expected 30-year return on stocks was slightly lower than last year, with the expected return on an all-stock portfolio dropping from 9.88% to 9.41% in 2022. Cash) rose slightly from 4.44% to 4.81% in 2022.
“Reducing investment risk makes sense for retirees who want a 90% chance of not running out of money and want a high degree of certainty and consistency in their annual cash flow,” Benz said.
But while that’s not surprising, “retirees who have some variation in their cash flow from year to year and are willing to accept the possibility of having a residual after 30 years are likely to favor a higher equity allocation,” he said. said. .
read more: How much can you contribute to your 401(k) in 2024?
How Morningstar came to this conclusion is complicated, but here is the link For the nitty-gritty details. (Trust me, it’s complicated.)
What’s the reasoning behind the math? As bond and cash yields rise, the future prospects of portfolio returns, and therefore the amount of money a new retiree can safely withdraw from a portfolio over a 30-year period, continue to increase over time. . A more benign inflation outlook also helps, with long-term inflation forecast for this year at 2.42%, compared with 2.84% last year, researchers said.
Here’s how it all works: If your initial investment is $1 million, the stated withdrawal rate is 4%, and the inflation rate is 2.42%, you would withdraw $40,000 from your portfolio in year 1, $40,968 in year 2, and $41,959 in year 3. soon.
“Retirees who have taken steps to expand the income of their non-retirement portfolio through strategies such as deferring Social Security or working longer may be in the best position to adopt a variable spending and withdrawal strategy,” Benz said. he said.
Among the retirement risks that can affect your chances of outliving your money, including inflation, market fluctuations, and high medical costs due to health crises, living longer may be the biggest threat .
In fact, most people don’t think about the risks of living a long life when they save for retirement in the years before they quit their jobs. “In our recent TIAA laboratory, study“More than half of American adults lack a basic understanding of how long people tend to live after retirement, and this knowledge gap makes it difficult to save enough money to last as long as you live.” may not be able to do so,” said Surya Koluri, director of TIAA. the institute told Yahoo Finance.
new study Jackson and the Boston University Retirement Research Center back Corli: A survey of nearly 1,000 investors aged 55 and older found that about a third underestimated their life expectancy. It was revealed. (See if you know your life expectancy by taking this six-question quiz from the TIAA Institute and the George Washington University School of Business’ Center for Global Financial Literacy Excellence.)
Time axis is a big variable
In many ways, longevity is the biggest variable that impacts your spending needs. For some financial advisors, the 4% withdrawal rate touted in the Morningstar report is simply too high. “There’s just too much risk,” said Joe Goldgrab, executive wealth management advisor at TIAA. “If market conditions are adverse during the first few years of retirement, your money will have less time to compound, and your savings could be depleted more quickly than you expected, especially if inflation is high. that’s right.”
In reality, a good retirement spending plan requires that only one-third of your retirement savings come from withdrawals from your investment portfolio, Goldgrab added. The remaining two-thirds should be lifetime income, such as Social Security, pensions (although these are becoming increasingly rare), and pensions, which workplace retirement plans should include as investment options. There are more and more places.
For retirees, getting this calculation right, or close to it, is critical to preparing for the skyrocketing costs of long-term care that can blow away all the best spending calculations.
This week, a disturbing report was published by KFF Health News and the New York Times about America’s long-term care crisis, calling it “dying bankruptcy.” The crisis has left many baby boomers facing the prospect of losing their savings due to rapidly rising long-term care insurance premiums. Among nursing care costs. Many people between the ages of 50 and 64 are nearing retirement, but only 28% say they have money set aside outside of a retirement account to cover future expenses. KFF polling. This percentage is higher for adults over the age of 65 (48%), but most adults in this group say they do not save money for this purpose.
The vast majority of adults pay an estimated $100,000 (90%) for a year in a nursing home or an estimated $60,000 (83%) for a year’s assistance from a paid nurse or aide. It says that it is impossible or very difficult. , according to KFF data.
As Yahoo Finance reported this summer, the average rate for an apartment in an assisted living facility was $73,000 per year as of the second quarter of 2023, according to the National Senior Housing and Care Investment Center (NIC), with costs ranging from $73,000 per year. It’s rising. As residents age and require more care. A unit for people with dementia can cost more than $90,000 a year.
4% rule continues
How much you can spend each year from your retirement account is a tap dance that is unique to your situation. And the 4% withdrawal rate is a standard that has been used as a tentpole for years and is still a percentage that is being said by financial advisors I contacted this week.
“For many years, we have traditionally used between 3.5% and 4% as a safe withdrawal rate for a moderate portfolio with 60% equity exposure and 40% fixed income exposure,” said a senior at the firm. said George Reilly, partner and financial planner. Riley Financial Group A man from Metuchen, New Jersey told me.
For people who begin withdrawing money in their mid-to-late 60s, assuming a life expectancy of 92 years, the initial withdrawal amount could be 3.5% to 4.0%, with the potential to increase by 3% each year, says the certified financial planner and senior strategist. says Catherine Tierney. edward joneshe told Yahoo Finance.
Of course, you may be able to afford higher starting withdrawal amounts if you have a shorter time to retire, for example by continuing to work until age 70 or older, she adds.
My takeaway: Use Morningstar’s ratings as a good starting point, then channel your inner improviser spirit.
Kelly Hannon is a senior reporter and columnist at Yahoo Finance. She is a workplace futurist, a career and retirement strategist, and the author of her 14 books, including “The World’s Best.”Taking Control Even Over 50: How to Succeed in the New World of Work.” and “You’re never too old to get rich.” Follow her on Twitter @Kellyhannon.
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