Keeping Rein on Withdrawals Key to Planning for Retirement
MarksJarvis, Gail, Tribune-Review/Pittsburgh Tribune-Review
People feel fragile after watching, during the financial crisis, a vicious bear market destroy half the money they had in the stock market.
Twice in the last decade, stocks ravaged savings, destroying 49 percent in the stock market in 2000-02 and then 57 percent in the 2007-09 financial crisis.
People now realize they can diligently save throughout their lives and lose an essential chunk of savings when it's needed most, just before retiring or during retirement.
Yet the last decade provides some reassurance. Despite one of the worst decades in stock market history, retirees who had balanced portfolios of roughly half stocks and half bonds, and quickly altered their spending just a bit when stocks plunged, have bounced back. It simply required paying attention to how much money a person withdraws from savings each year.
It's an approach that financial planners have long claimed would work. And with the help of T. Rowe Price's database, I examined the results from the harsh last decade.
According to a rule of thumb, retirees can make their savings last for 30 years of retirement if they withdraw no more than 4 percent of their savings the first year of retirement and then increase the sum just 3 percent a year to cover the effect of rising prices. In other words, with $500,000 in savings at retirement, a person can withdraw $20,000 the first year after leaving work to cover annual living expenses. The next year, the inflation boost means removing $20,600.
T. Rowe Price examined the rule of thumb by running thousands of market scenarios through what's called Monte Carlo computer simulations. If a person retired in January 2000 with $500,000 in savings and invested 55 percent of it in stocks and 45 percent in bonds, he would have been 89 percent sure of having enough money for 30 years in retirement. …