BERLIN — It took years to build your nest egg, and now you’re finally ready to take advantage of it. But will it be enough to cover the length of your retirement?
In a Merrill Lynch Affluent Insights Survey conducted in December 2010, 57% of those polled said that making their retirement assets last was their biggest worry — and that was before the market volatility of recent months. Indeed, in an investing environment in which interest rates are at historic lows and asset values continue to fluctuate sharply, a static financial strategy can carry significant risks. That makes it doubly important to establish a more creative strategy for tapping your retirement assets.
Conventional wisdom dictates that investors should plan to withdraw no more than 4% of their portfolio annually. But that estimate is overly simplistic, says David Laster, director, Investment Analytics for Global Wealth Management Investment Management & Guidance at Bank of America Merrill Lynch.
“It’s a mystery where that number came from, but it’s caught on with a fury,” he notes, adding that a flat percentage for annual withdrawal can’t account for longevity at retirement, the rising cost of health care, the desire to leave a bequest, potential tax increases and other factors.
That’s one of the reasons drawdown rates should be customized, says Laster, who has co-authored a Merrill Lynch white paper titled “Pitfalls in Retirement.” Begin by looking at all your expected sources of income in retirement, including Social Security, pensions, annuities, and your after-tax portfolio and tax-advantaged retirement accounts. Then go over the following questions with your financial advisor to work out a withdrawal strategy and an asset allocation plan.
Your financial advisor can help you plan your drawdown strategy based on your age and gender by using different scenarios for how long your retirement may last. For example, a person who postpones retirement until age 70 may be able to draw down 5% of his or her portfolio annually, while somebody who stops working at age 65 may be better off with 4%.
If good health and longevity run in your family, you might consider purchasing an immediate annuity, which can offer regular income for however long you live. You may also plan to take a smaller check to stretch the total longer.
“And remember that women have a higher life expectancy than men, so women should draw down slightly less than men,” Laster says.
Once you have a reasonable percentage, you can adjust the next year’s drawdown rate based on inflation. Say, for example, you have $1 million in retirement assets and you draw down 5%, or $50,000, the first year. If inflation is at 2%, the next year you may need to draw down 2% more, or $51,000.
Your Financial Advisor can also help you and your spouse devise a smart strategy for claiming Social Security benefits, by balancing your need for income over time with maximizing annual benefits. You could realize substantial financial benefits by delaying the start of your Social Security payout.
(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)