Make Your Retirement Savings Last Into Your 90s
by Walter Updegrave (CNN
Money, March 15, 2013)
Another article encouraging retirees to use a good retirement calculator and
revisit it each year to determine annual withdrawals.
Mr. Updegrave develops a 4% withdrawal strategy (with annual inflation
increases) for a retiree with $500,000 in accumulated savings who is age 65 and
wants his money to last for 30 years. He assumes inflation of 2.5% per
annum and some (undisclosed) assumptions for future returns on equities and
bonds.
When determining annual withdrawals, it is important to consider other
sources of retirement income that may not be indexed with inflation as well
as the impact future inflation may have on total spending amounts,
particularly if you want your total annual spendable income to keep pace
with inflation.
Using the V2.0 spreadsheet on this site and inputting 4% investment return,
2.5% inflation, $500,000 of accumulated savings and zero for annuity
income and amounts to heirs, we get an initial withdrawal rate of 4.08%,
which is reasonably consistent with Mr. Updegrave's calculation. However,
if we also input that this retiree has an annual fixed dollar pension of
$10,000 per year (immediate annuity), we get an annual withdrawal of 3.55%
from accumulated savings. Similarly, if we input a $10,000 deferred annuity
and 10-year period of deferral, we get an annual withdrawal percentage of
4.92%.
If we assume a 6% annual investment return and 4.5% annual inflation and no
annuity amounts, we get a withdrawal rate of 4.07% (just about the same as
in the lower inflation environment assumed by Mr. Updegrave), but inputting
a $10,000 immediate annuity drops the withdrawal rate to 3.25% under this
scenario and inputting a $10,000 deferred annuity results in a 4.67%
withdrawal rate.
Bottom line: Make sure the retirement calculator you use reflects your
financial situation (including other annuity income and bequest plans) and
you understand the implications of the assumptions you input (or that are
built into the calculator).
