How Much Money Can You Pull Out Of Your Retirement Account Each Year?

When it comes to retirement savings, most of the buzz that we hear is oriented around how to save the money and how to invest it to generate the largest possible nest egg.  But that part of the process is child’s play compared with trying to figure out how much you can withdraw each year to make that money last for the rest of your life. There are a few ways to guarantee that you will never outlive your retirement money but many of those reduce your monthly payout so low as to make them unattractive to all but the longest livers out there.  But for many people, a new product that combines indexing and life insurance can solve this puzzle and give them significantly more money to live on each month when they retire.  But you have to put this kind of program in action years before you retire in order for it to work for you.   

One way to describe the withdrawal problem, in uniquely southern terms, is to say that you don’t want to run out of gravy before you run out of biscuit and vice versa.  It is a simple concept that we all understand right away, yet the solution is very complicated.  What is the largest amount of money that can you take out of your nest egg each year and not run the risk of running out of money before you die?  Experts have worked on this problem for many years and the the answer itself is an elusive moving target.

Financial analysts have studied this problem trying to come up with a percentage of the total of your retirement funds that you can withdraw each year.  Of course the answer to this question depends on what kind of investment returns your nest egg can collect during the years of your retirement.  And the percentage of withdrawal that they recommend is of course influenced by the recent past investment returns.  These days, most experts will put the range of withdrawal rates at somewhere between 2% and 4%.  So, let’s crunch those numbers just a bit to give you an idea of what that looks like.  Assume that you have been very diligent over your lifetime and have managed to accumulate $1 million in your retirement account.  A 4% withdrawal each year would give you $40,000 per year.  Assuming your retirement funds are not Roth IRA funds, then it is likely that you will have to pay income taxes on that money.  Suddenly, that $1 million doesn’t seem like so much money.    Now imagine if there was a way to safely increase that withdrawal rate to 7%?  Now you would have $70,000 each year to live on.  That extra 3% could make a huge difference in your retirement lifestyle. 

To further complicate this decision though, consider that you just can’t choose a withdrawal number and stick with it with no future adjustments.  Prior to the 2008 market meltdown advisors were telling people that a 7% per year withdrawal was safe.  That is because they were relying on past history of stock market returns to make their calculations.  But this process is like driving a car by looking only in the rear view mirror.  There are many retirees out there who followed the 7% advice from their financial advisors who are now going to have to cut back their lifestyle dramatically after the market meltdown of 2008.   So you will need to constantly adjust your expectations and if you get it wrong early in your retirement, then you will have almost no way of making up the losses.

In the opening paragraph, I mentioned that there are ways to create income streams that you cannot outlive.  Annuities are tools that can do this very well.  The problem with straight annuities is that some are so expensive that they may not generate the monthly income that you need from your nest egg.  However, there is another, rather new solution.  One life insurance company is now offering a cash value life insurance policy that uses indexing to generate guaranteed lifetime withdrawal rates of 7% or more as long as you live.  And if you die early, unlike with straight annuities, the life insurance and cash value amounts return to your estate so that your investment is not lost.  Now these policies are not for everyone, for instance you need to be healthy enough to qualify for the life insurance policy in the first place.  Also, you need to act ahead of your actual retirement and get this in place a few years before you retire.  But once you have set this up and put this in place, you now have a bucket where you can transfer your retirement nest egg, or a portion of it, when you retire.  This will allow you to utilize this investment tool to allow you a much greater withdrawal rate for any funds that you drop into the policy.

At Clinard Insurance Group, located in Winston Salem, NC, we insure thousands of families all across North Carolina.  We can help you with your auto insurance, your home insurance as well as your life insurance or your business insurance.  Please call us toll free, at 877-687-7557 if you would like our help with any of your insurance needs.