You have reached the million dollar mark in your retirement savings. Congratulations! But now comes the tricky part: figuring out how much you can safely withdraw each year without running out of money.
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Let’s go break it down with some expert advice.
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The 4% rule: a starting point
Brandy Burch, CEO of BenefitBaysuggested starting with the tried-and-true 4% rule.
“If you have $1 million saved for retirement, a good rule of thumb is the 4% rule, which means you can withdraw about $40,000 a year,” she said. “This method aims to provide you with a steady income while keeping your nest egg intact over a 30-year retirement.”
But before you start planning your $40,000-a-year lifestyle, there’s more to consider.
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The Guardrails method: a more flexible approach
Tyler Meyer, founder of Retreat to Abundanceintroduced us to a more dynamic strategy called the guardrails method.
“At our company, we use the guardrail method which is based on the research of Jonathan Guyton and William Klinger,” he explained. “This method starts with an initial withdrawal rate, similar to the 4% rule, but includes ‘protections’ to adjust withdrawals annually based on portfolio performance.”
According to Meyer, this method could allow for a higher initial withdrawal rate of about 5%, or $50,000, in the first year. But here’s the important part: It’s not set in stone.
“If the portfolio performs well, you can increase your withdrawals, potentially enjoying a higher standard of living,” he said. “On the other hand, if the market underperforms, the method suggests reducing withdrawals to preserve the longevity of the portfolio.”
It’s all about working with what you have.
Know your expenses first
Before you get too excited about withdrawal fees, Wayne K. Maslyk Jr., President and CEO of Great Lakes Benefits and Wealth Managementsuggested taking a step back.
“First and foremost, whether you are a pre-retiree or a retiree, you must know where your money went over a 12-month period,” he shared.
Maslyk recommended a detailed review of your spending habits, including everything from housing and health to “mommy and daddy bailouts” for adult children.
Once you have your number – whether yearly or monthly – you know what you need to live the way you want. to want to live.
Adjusting your withdrawal rate
Once you’ve defined your spending habits, Maslyk said you should compare that number to your fixed income sources. If there is a deficiency, it offers a variety of withdrawal rates based on your goals:
“I suggest using a 3% withdrawal rate from your life savings as an allowance if you want to preserve your nest egg for your heirs, or a 4% or 5% withdrawal rate if consuming or eating your nest egg is OK,” he shared.
RMD Method
Dr. Barbara O’Neillowner and CEO of Money Talk and expert contributor to Annuidade.orgsaid the required minimum distributions (RMD) method may be the way forward.
“The revised 2022 RMD table includes distributions from retirement plans up to age 120,” O’Neill explained. “Many people with tax-deferred accounts use their RMD amount as an annual withdrawal because it’s easy to calculate, they have to withdraw the money anyway, and that virtually guarantees they won’t deplete their assets.”
Here’s how it works: If someone is 73 years old and has $1 million, the RMD would be calculated as follows: $1,000,000 ÷ 26.5 = $37,736 (rounded). Each year, the RMD amount will vary depending on changes in investment performance and divisors that decrease as retirees age.
Keep in mind that once you reach RMD age, these required withdrawals will take precedence over other methods if they are greater than other calculated amounts.
Life Expectancy Method
This approach takes a more personalized view of your retirement timeline.
“This is where people use one or more online calculators to estimate their life expectancy based on individual factors such as personal health status, health habits (e.g. exercise and smoking), and family health history,” shared O’Neill. “Then they divide their nest egg by the number of years they think they have left.”
For example, if you estimate you have 20 years left, your annual withdrawal would be $50,000 ($1 million ÷ 20 years).
Monte Carlo calculations
For those who like a more data-driven approach, O’Neill suggested Monte Carlo simulations.
“These are computer simulations that use statistical techniques and data on the performance of previous investments,” she explained. “Monte Carlo simulations calculate the probability of success – that is, not running out of money in your lifetime – and can provide guidance on how much money to withdraw annually to have a high probability of success based on the amount of assets and investment performance .”
If the probability of success is low, you may need to adjust your strategy, such as spending less or looking for higher investment returns.
Whichever you choose, you’ll likely earn between $30,000 and $50,000 a year to live on. Of course, you’ll probably want to talk to a final consultant to make sure you’re on the right track.
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This article originally appeared on GOBankingRates. with: If You Have $1 Million in Retirement Savings, Here’s How Much You Can Withdraw Each Year
