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On this calculator you choose the method of withdrawal stated as a percentage. Here are the three methods. - Take a percentage of the initial balance
- This would give you a fixed amount each year. I would never recommend this. Yes, depending on the interest rate you can earn, your balance may grow tremendously, but your fixed annual withdrawal will not keep up with inflation.
- Take a percentage of the balance at the beginning of each year.
- Depending on inflation and the rate you can earn, you may or may not be able to maintain your inflation adjusted purchasing power - even if you're withdrawing less (as a percentage) than what you can earn.
- Take a percentage of the initial balance, then adjust that annually for inflation.
- In most circumstances, this would be the best method to use of the three. However, depending on the rate you can earn and inflation, you still may not have enough money to last through your retirement.
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EXAMPLES: - The assumptions:
- You're 50 years old and would like to retire at 60 (in 10 years). Your spouse will retire with you.
You and your spouse currently have $200,000 in a taxable account to which you're no longer contributing. You also have $150,000 in IRAs (between you and your spouse) and will continue to contribute $4000 ($2000 each spouse) each year until you retire at 60. You're earning 10% per year on your taxable and IRA money and expect that to continue. You just used my Savings Calculator and found that you will have $971,559.56 (between your taxable account and IRAs) in 10 years. You think you can earn 9% per year in retirement and assume inflation will average 3.5% per year. You want the money to last for 35 years. Since you're earning 9% per year, you feel quite comfortable only taking out 6%. Here's what will happen in each scenario;
- Withdraw 6% of the initial balance
- You'll withdraw $58,293.57 every year. Wow, you're thinking... that's great! You're living on $40,000 today. You're going to be rich!!!
- Looking closer at the schedule... in 10 years at 3.5% annual inflation, $58,293.57 will only buy what $41,325.41 buys today. Oh well, you think... that's OK.
- Looking even further down the schedule... every year your money will buy less and less. However, your savings account balance is growing like crazy! There must be a better way......
- Withdraw 6% of the balance at the beginning of each year
- You'll withdraw $58,293.57 the first year. That's OK.
- Looking closer at the schedule... your balance is growing at an acceptable rate for you. The withdrawal is increasing each year, but still won't keep up with inflation. There still must be a better way......
- Withdraw 6% of the initial balance and then adjust that annually for inflation
- Once again, you'll withdraw $58,293.57 the first year (at 3.5% inflation, equivalent to $41,325.41 today). That's OK.
- Looking closer at the schedule... your withdrawal will keep up with inflation, you'll have enough money to last 35 years and your annual balance is acceptable to you. You decide to go with this method for your situation.
-- Remember, any Social Security and/or Pension benefits you may receive will be added to that income. --
Don't forget to review your plan periodically or as requirements change!
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