The 78 million Americans who make up the baby boom generation started turning 65 in 2011, and almost 30 million of them have a defined contribution retirement plan such as a 401(k) account, according to the Employee Benefit Research Institute. That means these near-retirees face an important question: How much money can they afford to withdraw from their retirement accounts?
Prior to 2008, financial advisers often encouraged investors to withdraw as much as 7% of their retirement assets each year. The idea was that the return on the retirees’ portfolios could potentially be greater than 7%, so the sizes of the portfolios would stay about the same.
Now it’s a new world, with market volatility the norm. If a new retiree withdrew 7% from a $2 million nest egg each year starting in 2000, he or she would have been left with only $394,634 by the end of last year, according to The Wall Street Journal.
The market’s volatility over the past few years has made it impossible for many new retirees to determine how much they can safely withdraw from their retirement accounts each year without running the risk of depleting their nest eggs before they die.
For example, if you adopted a 5% withdrawal rate in 2007 and your portfolio was decimated in 2008, you’d need to withdraw a much greater percentage in 2009 to obtain the same income.
It’s impossible to devise a one-size-fits-all withdrawal strategy,
but one thing is fairly certain in today’s market environment: Investors can’t just set their asset allocation and forget about it. It’s important to examine your portfolios and adjust your withdrawals regularly, such as annually.
Full Social Security benefits are available as early as age 65, depending on your date of birth.
If you choose, you may receive benefits at age 62, but your benefits will be reduced. Or you can delay benefits until age 70, in which case your benefits will increase.
Which option you choose depends on your life expectancy and your needs.
Social Security calculates monthly payments so that if you start taking payments early, the smaller payments received over a longer time could total the same amount as if you had started receiving benefits at normal retirement age.
On the other hand, if you start taking payments late, the bigger payments received over a shorter time could total the same amount as if you had started receiving benefits at normal retirement age.
However, all these calculations are based on your normal life expectancy. If you live beyond that life expectancy, then delaying benefits will result in higher monthly payments and a potentially higher lifetime total. So, if you are in good health and have a family history of longevity, delaying benefits may provide more money in the long run. But if you don’t expect to reach or exceed your life expectancy, then it may make sense to start as soon as allowed.
If you plan to save your Social Security benefits, taking them early – even though they will be reduced – may be a good idea.
That’s because the return you receive on the invested money might make your total benefit greater than the increased benefits you will receive if you take Social Security on time or delay benefits until age 70.
There are many other factors to consider when deciding when to take Social Security benefits.
For more information, it is probably wise to seek advice from a professional.