From Generation Z to Baby Boomers, one of workers’ deepest fears about retirement is running out of money. So figuring out how much to withdraw from your retirement account each year for living expenses can be nerve-wracking. If you get it wrong, the consequences can be disastrous and heart-wrenching.
But here’s some good news.
According to Morningstar recommend Figures released this week show new retirees can safely withdraw 4% of their retirement savings each year over the next three decades without emptying the till. This is the highest safe withdrawal ratio since Morningstar began conducting the study in 2021. Last year, the ratios were 3.8% and 3.3% respectively. 2021 percentage.
Researchers said the new withdrawal rates are based on a conservative retirement savings portfolio of 20% to 40% in stocks, 10% in cash and the remainder in 30-year bonds.
read more: How much money do you need to retire?
Why should we give retirees a raise this year?
“Higher bond yields make everything easier for retirees and help explain why our highest safe withdrawal percentages correspond to portfolios with only 20% to 40% equity,” Morningstar’s Personal Christine Benz, finance director and co-author of the study, told me.
Otherwise, investing a higher percentage of your retirement portfolio in stocks will affect your calculations. Data shows that if you have 70% invested in stocks, the safe withdrawal rate drops to 3.8%.
From a numerical perspective
The expected 30-year return for stocks in this year’s study fell slightly from the previous year, with the expected return for the all-stock portfolio slipping to 9.41% from 9.88% in 2022. Meanwhile, expected fixed income returns, including cash, edged up to 4.81% from 4.44% in 2022.
“For retirees, reducing investment risk makes sense because they seek a high degree of certainty and consistency in annual cash flow and a 90 percent chance of not running out of money,” Bentz said.
However, it makes sense that “retirees who are comfortable with some variation in annual cash flow and the possibility of leaving a residual balance after 30 years may favor a higher stock allocation,” she said.
How Morningstar came to this conclusion is complicated, but This is the link Learn the specifics. (Trust me, it’s complicated.)
What’s the reasoning behind the math? As bond and cash yields rise, the forward-looking outlook for portfolio returns — and the amount new retirees can safely withdraw from those portfolios over 30 years — continues to edge up slightly, researchers say. The outlook for inflation also plays a role, with their long-term inflation forecast for this year at 2.42%, compared with 2.84% last year.
The whole process works like this: Starting with an initial investment of $1 million, with a prescribed withdrawal rate of 4% and an inflation rate of 2.42%, you will withdraw $40,000 from the portfolio in year 1 and $40,968 in year 2 USD, withdraw $41,959 in the 3rd year, very quickly.
“Retirees take steps to expand non-retirement portfolio income through strategies such as delay social safety net and / or working longer hours will be best able to employ variable spending and exit strategies,” Bentz said.
Of all the retirement risks that could affect your chances of running out of money—including high out-of-pocket medical costs from inflation, market volatility, or a health crisis—longevity may be your biggest threat.
In fact, most people do not consider longevity risk when saving for retirement in the years before exiting the workforce. “In our recent TIAA Institute studyMore than half of U.S. adults lack a basic understanding of how long people live in retirement, a knowledge gap that could prevent them from saving enough to last a lifetime. TIAA director Surya Kolluri told Yahoo Finance.
a new one study Jackson and the Center for Retirement Research at Boston College back Kolluri: Its survey of about 1,000 investors age 55 and older showed that about a third underestimated their life expectancy. six question quiz Find out if you can take control of your life expectancy, according to research from the TIAA Institute and the Center for Excellence in Global Financial Literacy at the George Washington University School of Business. )
Time frame is a big variable
In many ways, longevity becomes the most important factor Changing This affects 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 the market “doesn’t do well financially in the first few years of retirement, your money isn’t going to have that long of compounding time, and you’re “Savings may decline faster than expected. This is especially true if inflation is high.”
In fact, Goldgrab adds, a good retirement spending plan should have only one-third of your retirement income come from portfolio withdrawals, and the other two-thirds should be lifetime income, such as Social Security, pensions, but these are are becoming increasingly rare—and annuities, which are increasingly being offered as an investment option by workplace retirement plans.
It’s critical for retirees to get the math right or nearly right in order to prepare for a spike in long-term care costs that can throw off all the best spending calculations.
This week, KFF Health News and The New York Times published a troubling report, “On the Brink,” about America’s long-term care crisis that has dozens of baby boomers worried about their Savings may be wiped out due to a sharp increase. Among people ages 50 to 64, many of whom are approaching retirement, only 28% say they have money left aside from retirement accounts to cover future living assistance costs. KFF pollingThe share is higher among adults 65 and older (48%), but the majority of adults in this group say they have not set aside any money for this purpose.
A staggering majority of adults say it is impossible or difficult to pay the estimated $100,000 needed for a year in a nursing home (90%) or the estimated $60,000 needed for a year of paid nurse or aide assistance (83%), according to KFF data.
As Yahoo Finance reported this summer, an apartment in an assisted living facility average rate According to the National Investment Center for Seniors Housing and Care (NIC), the annual cost will be $73,000 as of the second quarter of 2023, with costs rising as residents age and require more care. Dementia units can cost more than $90,000 a year to run.
The 4% rule still applies
How much a person can spend from a retirement account each year is really a tap dance that varies based on individual circumstances. The 4% withdrawal rate is the standard that has been used as a backbone for years and is still the percentage that financial advisors talk about today. I got in touch this week.
“For many years, we have traditionally used anywhere between 3.5% and 4% as a safe withdrawal rate for a modest portfolio containing 60% equity exposure and 40% fixed income exposure,” George George Reilly Senior Partner and Financial Planner Riley Financial Group Someone from Metuchen, New Jersey told me.
Katherine Tierney, certified financial planner and senior strategist at Katherine Tierney, says that assuming a life expectancy of 92 years, someone in their mid-to-late 60s who starts withdrawing money could accept 3.5% to 4.0% initial withdrawal, increasing by 3% annually. Edward Jonestold Yahoo Finance.
Of course, if your retirement is shorter because you worked until age 70 or older, you may be able to afford a higher starting withdrawal amount, she adds.
My takeaway: Use Morning Star Prices as a good starting point, then channel your inner improvisational spirit.
Kerry Hannon is a senior reporter and columnist at Yahoo Finance. She is a workplace futurist, career and retirement strategist, and the author of 14 books, includingTaking Control Over 50: How to Succeed in the New World of Work” and “You’re never too old to be rich.” Follow her on Twitter @kerryhannon.