|John Waggoner, email@example.com, USA TODAY|
If you read any financial advertising, you know that your savings are inadequate, and you're likely to freeze to death in the dark a few weeks after retirement. For this reason, most Americans' retirement planning involves keeling over at their desks or, failing that, starting a bomb-disposal unit as a retirement business.
But how much is enough? How about
Financial planners have long said that if you want your savings to outlast you, you should start with an initial withdrawal of 4% to 5% of your savings. Because the median family income — half are higher, half are lower — is about
How would that have worked in the past decade? Fairly well, despite the worst bear market since the Great Depression. The assumption: You withdrew
Your retirement started in
•S&P 500 index funds. Even after taking
•Balanced funds.Traditionally a mix of 40% bonds and 60% stocks, these funds are noted for relative stability and yield. After a decade of withdrawals, you'd have about
•Government bond funds.Unlike stocks, bonds really haven't had a bear market in the past decade. But they don't pay a great deal of interest, either. The bellwether 10-year Treasury bond yield has averaged 3.35% since
•Money market funds. You'd have problems here, because money funds have yielded less than the North Koreans on trade talks for most of this decade. Your retirement kitty after a decade of withdrawals:
With the exception of money market funds, your
The most glaring caveat is inflation, which has averaged 2.3% annually the past 10 years. While annual price increases have been modest, the effects of inflation are cumulative. Had you increased your withdrawal for inflation each year, you'd be pulling out
Inflation would be the biggest danger as you continued to withdraw. If your money fund continued to earn nothing and inflation was flat — an unlikely scenario — you'd be broke in 12 more years. Inflation would speed up that process, even if your money fund started to pay interest.
Why have stocks held up so well? In part, because there was a bull market from 2004 to 2007, which gave your stock fund some altitude before the bear market. In your first 12 months, for example, you would have taken out
That 8.1%, incidentally, includes dividends, without which the S&P 500 has gained about 5.9% a year. Increasingly, stock returns have depended on dividends and buybacks for their total return. The current payout ratio for the S&P 500 — buybacks plus dividends — is about 5%.
What are other caveats?
•These figures don't include taxes. If you're investing in a tax-deferred retirement account, such as a 401(k), Uncle Sam will be waiting when you take money out. If your tax rate is 15%, you'll need to pull out
•You don't have to replace your entire income.You need to be able to pay your expenses, and that depends on a variety of factors, from whether you've paid off your house to how much you enjoy blackjack in
•You don't have to give yourself a raise every year. If the market's having a down year, skip the raise and tighten your belt. You can increase your withdrawals after a good year. They do happen.
The largest problem with living off
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