2013
Met Life did a survey in 2008 of people who were about to retire with their 401(K) plans and they were asked ‘what do you think a safe withdrawal amount is? The answer on average was about 10 per cent a year.
From My Money Design
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• My balance will grow by an average of 6% annually.
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• Inflation will decrease my portfolio by an average of 3% annually.
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• Therefore, I should be able to safely withdraw an average of 3% annually from my retirement balance.
Do you agree with the above? Do your investments earn a steady 6%? Is 3% of your investment sufficient to live on?
Cast your vote in the poll on the right.
QUINNSCOMMENTARY 
Realistically, most people will not live exclusively off their interest. What you really need to do is assume a conservative rate of return and then figure out how much principle and interest you can take out in order for your money to last assuming a life expectancy at least two standard deviations beyond the average life expectancy. A conservative return assumption combined with an aggressive life expectancy assumption should give you strong odds that you won’t outlive your money.
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Most average people will receive at least forty percent of their income from Social Security, so they need to make up the other 60% plus deal with inflation on at least that 60%. The problem is mostly for upper middle class people who must fund the bulk of their retirement but are not so rich as to build up surplus assets over their working lives, perhaps between incomes of $100,000 and $500,000. To maintain a lifestyle at that income level requires a substantial pool of money and that assumes that a goal is not to leave assets for heirs. For example, at age 65 to generate an income of $20,000 a month requires about $3,529,000 using annuity interest rates. To provide that same benefit with a survivor annuity requires $4,356,888 and neither accounts for inflation over the years.
While assuming a conservative rate of return and aggressive life expectancy (most planners use age 95) is a good strategy, that also means the initial pool of money must be larger than for more liberal assumptions.
The old idea that expenses go down in retirement is totally bogus, unless retirement means sitting in front of the TV all day every day and nothing more. In reality, any supposed savings from not working are more than offset by new expenses, and dealing with inflation. That means that the goal is to replace 100% of pre-retirement income and to find a way to deal with inflation. Not an easy task for people without a defined benefit pension, or even with for that matter.
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If 3% is your bogey and you would like your income to rise over time, then dividend growth stocks have to be a part of the solution. Too many people have a simplistic view of risk, which is bonds are less risky and stocks are more risky. The problem with that is that price really matters a lot more than the asset class. That’s the blind spot that financial planners have, the limitation of conventional wisdom about asset allocation. Overpaying for bonds (or buying an annuity using current interest rates) can be a lot more risky than buying stocks that pay dividends well above 10 year bond rates, have the capacity to raise the dividends and are historically cheap. If your time horizon is literally death and you don’t plan on dipping into principle, then day to day volatility in the stock price should really not be considered a big risk for you (the one caveat is if you had an emergency and had to withdraw principle during a market swoon).
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In a very broad sense this is a template for how much you might need in retirement, but like any forecasting it relies on assumptions. For something as important as what may be an irrevocable decision of when to retire and what your future quality of life might be in retirement, you need to be a lot more specific. How much risk you are willing to take that your plan will fail, will determine the growth of savings calculation. These days a 6% assumption of growth sounds quite risky. To get this type return you are not talking about conservative fixed income investments. Can you live on 3% of your savings annually? That depends on your lifestyle assumption and the future rate of inflation. Deciding when and how much you need in retirement is a crap shoot. Make the bet when the odds are in your favor.
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Good points all. The great unknown which I am learning first hand is the increasing cost of living, including medical costs beyond any Medicare and supplemental coverage. My opinion would be to withdraw from assets no more than half the actual rate of return or perhaps three quarters, but in any case a variable, but not fixed amount like 3%. In addition, I believe it is critical to have a good reserve fund at the start above any retirement funds. The one thing that will kill a plan is having to take large amounts out of assets in the early years. There are always going to be emergencies such as large car repairs, house repairs and such.
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