NEW YORK (MainStreet) — How much of your retirement savings can you withdraw each year – 7% or 1.8%? Or something in between?
The answer, of course, will make a huge difference in your lifestyle. Fortunately, if you need a smaller withdrawal to keep your nest egg going, it may not have to be permanent, and people in or near retirement can consider some attractive short-term lifestyle changes to keep life interesting on a reduced budget.
The key: Keep flexible by avoiding big long-term commitments such as a second home, a large mortgage, oversized car payment or owing a pricey, unsalable condo with big association fees.
Since the early 1990s, many financial advisers have recommended starting retirement with a 4% annual withdrawal rate, or $40,000 for a $1 million nest egg. If you start there, you can increase the annual withdrawals by enough to offset inflation and keep going for 30 years.
That was the theory, anyway. But recent research says that as conditions change the withdrawal figure could be as high as 7% and as low as 1.8%. That impressive $1 million nest egg could therefore generate a tidy $70,000 a year, or a stingy $18,000 -- before taxes.
The second point: You might well have to trim your withdrawals if the markets dip. Taking a full withdrawal when your stocks are down could inflict permanent damage on your nest egg, especially if the markets stayed down for several years.
This is where the temporary lifestyle adjustments come in. They can be an appealing alternative to the standard money-stretching strategies of retiring later, working part time or reducing your annual retirement income permanently. With a significant but temporary cutback, you can leave your nest egg intact but preserve an attractive future.