Say Goodbye to the 4% Rule
Can your nest egg last your whole lifetime? It's getting tougher to tell. Conventional wisdom says you can take 4% from your savings the first year of retirement, and then that amount plus more to account for inflation each year, without running out of money for at least three decades. This so-called 4% rule was devised in the 1990s by California financial planner William Bengen and later refined by other retirement-planning academics. Mr. Bengen analyzed historical returns of stocks and bonds and found that portfolios with 60% of their holdings in large-company stocks and 40% in intermediate-term U.S. bonds could sustain withdrawal rates starting at 4.15%, and adjusted each year for inflation, for every 30-year span going back to 1926-55. Well, it was beautiful while it lasted. In recent years, the 4% rule has been thrown into doubt, thanks to an unexpected hazard: the risk of a prolonged market rout the first two, or even three, years of your retirement.
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One way to manage retirement withdrawals is to use life-expectancy tables such as the one the Internal Revenue Service uses to establish required minimum withdrawals from individual retirement accounts. This works almost as well as more-sophisticated modeling done by retirement-research experts at Morningstar Inc., those experts say. IRA distributions don't have to start until age 70½, but the IRS publishes life-expectancy numbers for earlier ages as well in Appendix C of Publication 590 at irs.gov.
Here's how it works: Using your nest-egg balance as of Dec. 31 of the previous year, you would look up your age in the IRS table and divide your account balance by the life expectancy given for that age. Let's say you saved $1 million (it is from the WSJ...) and retired at age 62. Your life expectancy, according to the IRS, would be 23.5 years. So, you would divide $1 million by 23.5, arriving at a withdrawal amount of $42,553. If your account balance grew the following year by 5% to almost $1.01 million, you would withdraw $44,287 (the new balance divided by your 63-year-old life expectancy of 22.7 years). But if your savings shrank 5% to $909,575, you could withdraw only $40,069.
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And while your withdrawal amounts could shrink in any given year, this is a more flexible approach than one being recommended by some retirement-planning pros: lowering the initial withdrawal rate to the 2% to 3% range and then adjusting for inflation each year. With 4% a stretch for many retirees to live on, even with the help of Social Security, 2% could prove impossible. The life-expectancy approach may also result in withdrawals of less than 4% in some years—or even every year—but it doesn't call for withdrawals below 4% every year regardless of what the markets do.
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http://online.wsj.com/article/SB10001424127887324162304578304491492559684.html
(If you cannot open by clicking, copy and paste the title onto google)
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This sounds interesting. I think I will use this approach when we are ready to start withdrawing from our IRAs... within the next two years.