Planning Ahead: Calculating Retirement Income

Retirement can be an enjoyable, rewarding time of your life - as long as you don't outlive your financial resources. To help make sure that doesn't happen, you need to know how much you can withdraw from your savings and investments each year during your retirement.

How can you establish this figure? Suppose you've determined that your annual expenses during retirement will be $80,000. You've also estimated that you can count on $20,000 from Social Security and $20,000 from an annuity in which you've invested. To meet your yearly expenses, then, you still need $40,000 of income from your investment portfolio, which includes your 401(k) or other employer-sponsored retirement plan, your IRA, and any other savings and investments you've accumulated. If you had a $500,000 portfolio, and you withdrew $40,000, your withdrawal rate for that year is eight percent ($40,000 divided by $500,000).

As you can see, it's easy to calculate a withdrawal rate for your retirement years. But to determine if this withdrawal rate is sustainable - that is, if it can be maintained throughout your lifetime or if it will need to be adjusted - you'll need to consider a variety of factors, such as the following:

Lifestyle - Your projected income needs - and, as a result, your withdrawal rate - may be based on a certain lifestyle. For instance, early in your retirement, you may be planning to travel the world. Later on, though, if you decide to slow down, you may find you need less income to cover your spending needs (though you may need to spend more on health care).

Time horizon - Generally speaking, the longer your retirement, the smaller the percentage of your retirement savings you can withdraw each year. But this time horizon isn't fixed; you could decide, for example, to work longer and retire later than you had originally planned.

Inflation - In recent years, inflation has been low, but no one can predict its future course. But even at a relatively mild three percent annual inflation rate, that $40,000 you were planning to withdraw each year will, after 20 years, only have the equivalent purchasing power of about $22,000 in today's dollars.

Market activity - Movements in the financial markets could positively or negatively affect the size of your portfolio and, therefore, the amounts available to you for withdrawal on an annual basis.

Estate planning goals - Over time, your estate planning goals can change. Different events - such as the college funding needs of a grandchild or new philanthropic interests that you've developed - may cause you to spend more money in your lifetime than you had once thought, thereby altering the amounts available to you for withdrawal during retirement.

As the above factors indicate, you may need to adjust your withdrawal rate repeatedly over the years. But as long as you're aware of these changing withdrawal rates, you should be able to avoid unpleasant "surprises" during your retirement years while you enjoy the lifestyle you've envisioned.

Finally, know that making decisions of this nature do not have to fall solely on your shoulders. Consider speaking with a financial advisor who can provide knowledge and resources to help you invest in a way that enables you to make progress toward your financial goals for retirement.

SOURCE: http://www.hometownannapolis.com/news/bus/2011/11/01-17/Planning-Ahead-Calculating-retirement-income-Know-your-withdrawal-rate.html