Market Beat: Estimating your retirement spending
September 2, 2014
Groucho Marx once quipped, "There's one thing I always wanted to do before I quit … retire!"
If you're fortunate enough to be ready for retirement, you should plan your income needs very carefully. There are several factors you need to consider when estimating how much money you should withdraw from your retirement account.
You'll have to plan for how long you'll need the income to last. According to life expectancy tables from the Social Security administration, a 65-year-old male today has an average life expectancy of 17.57 years, and a 65-year-old female has a life expectancy of 20.20 years.
For a 65-year-old married couple retiring today, there is a very good chance that one of them will live for 30 years or more. Women tend to live longer than men and typically are younger than their spouses by about 3.5 years.
The rate of return you can expect to earn from your retirement account needs to be calculated as well. Using long-term historical averages is a good approach, but you should also consider what could happen to your funds during a long bear market or if interest rates continue to stay low.
In a normal interest rate environment, a retiree fortunate enough to have a $1 million portfolio could obtain an income of $45,000 to $50,000 per year by investing in benchmark 10-year U.S. Treasury bonds and have no risk to his or her principal if the bonds are held to maturity, as they are backed by the full faith and credit of the United States government.
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Today, a retiree with a million-dollar account can only get an income of about $24,000 per year by investing in 10-year Treasuries.
Inflation is another consideration. In recent years, inflation as measured by the CPI, or consumer price index, has been relatively tame, averaging 2-3 percent per year. You may want to look at your own budget and determine an inflation number for the goods and services that you prefer to consume.
According to John Williams at ShadowStats.com, if inflation were still measured today the same way it was in 1980, it would have averaged about 9 percent over the last four years.
A rule of thumb when it comes to calculating retirement income is known as the 4 percent rule, which says that you should start your retirement withdrawals at 4 percent of your starting principal, then add an inflation adjustment each year.
It's really more of a general guideline than a rule; you should carefully consider your own situation when estimating your retirement income.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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