How much is the right amount to withdraw from retirement savings?
OK, so you’ve managed to squirrel away a nice chunk of money in your retirement fund. Now you’re ready to start taking the money out and you know, living off it.
But is there a sensible rule of thumb to employ so that you don’t run out of savings before you run out of life?
According to the Daily Mail in the U.K., there is a new idea making the rounds.
Investment company Vanguard says there’s a way to help make sure your money will last the 35 years or so that you may need it to last, the Daily Mail reports.
“The firm suggest savers determine their income by multiplying their portfolio by five per cent, then comparing it with the previous year and adjusting how much they remove accordingly,” the article says.
“If the fund is higher than the previous year, retirees should withdraw up to five per cent while if the portfolio has depreciated in value, income should be decreased by roughly two per cent.”
Simply put, don’t take out the same amount every year. Take out up to five per cent if your savings have gone up in value, and take out less, say three per cent, if it has not.
The conventional withdrawal rule that has been bandied about for years in the industry is that you can safely withdraw four per cent from your savings annually.
The new Vanguard formula flies in the face of that wisdom, and the four per cent rule was recently questioned by financial author Jason Heath in a MoneySense article.
“Over the half decade I’ve written this column and attempted to practice what it preaches, a central pillar has been the so-called 4 Per Cent Rule,” he writes.
“Problem is, with `lower for longer’ interest rates and the spectre of negative interest rates, is it still realistic for retirees to count on this guideline? Personally, I find it useful, even though I mentally take it down to three per cent to adjust for my own pessimism about rates and optimism that I will live a long, healthy life,” he writes.
He goes on to cite other experts who say four per cent “is a reasonable rule of thumb” for non-registered savings, but once RRSPs are converted into RRIFs, higher withdrawal amounts are mandated by the government anyway, making the withdrawal formula “moot.”
Let’s digest all this. You’ve got savings, you want to live on those savings. But up until now you have never had to live on a lump sum amount that gets smaller every year – you are used to getting a paycheque. Whether you take out two, three, or four percent (or some other mandatory percentage) of your savings every year, there will likely be less money in the piggy bank each year you get older, particularly at a time when interest rates are so low.
Do we want to be pre-occupied with withdrawal rates and decumulation strategies while we are trying to hit golf balls onto the fairway? Surely not.
But wait – if you’re a member of the Saskatchewan Pension Plan there’s a solution to this problem. SPP offers a variety of annuities for its members. When you come to retirement, you can convert any or all of your SPP savings into a monthly income payment – a lot like your old paycheque – that comes to you in the same amount for the rest of your life. You can never run out of money, no matter how long you live or what markets and interest rates do. Security is guaranteed. Check out SPP today.
Written by Martin Biefer
Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.