Want a Higher Retirement Withdrawal Rate Than 4%? Here’s What You Need to Do
Many people work hard to build a retirement nest egg. But when their careers are truly over, they are disappointed to realize they can only withdraw a limited amount of money each year from their IRA or 401(k).
Financial experts tend to support the 4% rule for managing the retirement nest egg. The rule states: If you withdraw 4% of your money IRA or if the 401(k) account offsets your first year of retirement and adjusts future withdrawals for inflation, your savings should last 40 years.
This rule is logical at first glance. The problem is that it may not provide the annual income you want.
If you start retirement with a $1 million IRA, which is a lot of money, the 4% rule will only give you $40,000 a year. And probably some money though Social Security Moreover, this amount may still not reach the annual retirement income you hope for.
The good news is that you can generate more income from your savings than the 4% rule allows. However, you will have to take some risks to make larger withdrawals.
The 4% rule was derived from the assumption that typical retirement savers will hold a fairly equal mix of stocks and bonds in their portfolios. If you want to earn more annual income from your savings, the answer is simple; take more risks. Focus on stocks in your portfolio so that your investments can provide higher returns.
If you have a retirement portfolio that is 70% stocks and 30% bonds, you can maintain a 5% withdrawal rate without the risk of running out of money. If your portfolio consists of 80% stocks and 20% bonds, you may be comfortable withdrawing 6% of your balance each year or more.
Of course, this strategy is not without risk. It’s one thing to have 70% or 80% of your portfolio in stocks when you’re working and many years away from retirement. It’s much riskier to have such a large percentage of your assets in the stock market when you’re actively making retirement plan withdrawals.
But this strategy can still work if you have a backup plan in the form of generous cash reserves. If you always keep enough money on hand to cover two to three years of living expenses, you will help reduce the risk of having most of your investments in stocks.
