Last Week’s Question of the Week: What percentage of Americans between the ages of 60 and 70 have a mortgage when they retire? Is it 20%, 44%, or 70%?
ANSWER: 44 percent of Americans between the ages of 60 and 70 have a mortgage when they retire.
HOST: One area I am guessing that people are trying to figure out when they retire, is how much can they safely take from their investments on a yearly basis? Nobody wants to run out of money, right?
KLAAS FINANCIAL: Yes, cash flow as you enter retirement is critical. When retirees think about risk, many say outliving their money is their number one fear. The three elements that most significantly affect planning are the need for real, not nominal, cash flow (i.e., an income stream that increases with inflation); the risk of having to sell assets to provide income at the wrong time (i.e., during a bear market); and the likelihood of future decades of historically low market returns. So, as planners managing the withdrawal rate from your investments that is sustainable over the course of your retirement will play an essential role in your retirement income plan.
So the first thing we need to discuss is what kind of withdrawal rate you should consider. What is a withdrawal rate? This is the amount you can safely take out of your portfolio in a given year so that you don’t run out of money.
How to figure this out: Outflows-Inflows divided by Assets.
Obviously your withdrawal rate is not only affected by the income you need, but also by your various income sources — Social Security, pension, spousal income, part-time employment, etc. Depending on your age at retirement and special expenses (health insurance premiums prior to age 65) may help determine how much you will need to take?
The real question is how sustainable is the withdrawal rate? Understanding the impact of the withdrawal rate and how it is affected by inflation etc. may cause us to be even more careful. Looking at how much debt you have going into retirement will also be a factor.
HOST: So, what is the rule of thumb on withdrawal rates these days?
KLAAS FINANCIAL: It depends! Always our favorite answer. : )
When we are looking at constructing balanced/conservatively growing portfolios these days,and understanding longevity we are suggesting an approximate 4% pull, but this depends on each person’s situation.
If we look at your retirement planning horizon, we can typically determine a good starting withdrawal amount based on your years in retirement, your current age, your specific portfolio mix (stocks and bonds etc); health and longevity factors; and the probability of success you are comfortable with (risk).
Of course, the idea is to stay ahead of inflation, while sustaining the lifestyle that you would prefer. If the market returns 10% this year, should you take 10%? … No.
HOST: I have heard you talk about how much cash flow to plan for in retirement vs. your pre-retirement income?
KLAAS FINANCIAL: Yes, based on what we have seen, it is likely that you will need about 70-80% of your pre-retirement income when you go to retire, as most people don’t want to reduce their style of living in retirement.
Also, keep in mind that according to the U.S. Census Bureau, the average length of retirement in the United States is currently 18 years, and the average age at which people retire is 63. That may a larger nest egg than you originally planned for.
According to the latest Bureau of Labor Statistics data, which is based on 2016 figures, “older households” — defined as those run by someone 65 and older — spend an average of $45,756 per year, or roughly $3,800 a month. That’s about $1,000 less than the monthly average spent by all U.S. households combined.
HOST: So, what happens when I turn 70-1/2? I know I am forced to take out my money. How fast of a withdrawal amount do I have to take?
KLAAS FINANCIAL: Yes, you are talking about RMD’s. Since we are discussing withdrawal rates this is a perfect question.
- Once you turn 70½, the IRS requires you to take a certain amount of money out of certain retirement accounts every year. Coming from 401ks, 403bs and IRA’s unless you are still working there are a few exceptions. There are no Required Minimum Distributions for a Roth IRA (unless you inherited the account), though RMDs are required for Roth 401(k)s.
- You have to take your first Required Minimum Distribution no later than April 1 of the year after the year you turn 70½.
- How much to take? Remember that your RMD distribution is NOT on top of your other cash flow amount.
The size of your Required Minimum Distribution will be determined by the amount of money in your retirement accounts and the IRS’s life expectancy estimates. Most people turning 70½ this year will need to total their balances of their RMD-eligible accounts and then divide the total by the IRS’s figure: 27.4. For example, say you have $200,000 in traditional IRAs. In that case, you’ll need to withdraw $7,299 ($200,000 divided by 27.4). Approximately 3.65%, which goes up each year.
Exception to the rule: If you’re married and your spouse is more than 10 years younger.
HOST: You also want retirees to make sure they have liquidity within their accounts, too?
KLAAS FINANCIAL: Yes, we want to remind our listeners who are in the thick of retirement planning to also remember the importance of having liquidity and emergency savings.
- Your cash reserve should include 3-6 months’ worth of living expenses, or more.
- It only takes one unexpected event , a broken furnace, an unexpected medical bill, or a job loss that wasn’t planned to derail your retirement funding. If you are putting everything into a retirement account and have very little in savings, it is probably a good idea to back off of your retirement savings, and accumulate some income and put this into a traditional savings account.
- Create a process, a systematic savings plan where you are paying yourself first and make building your cash reserve a priority. Most banks or credit unions let you set up automatic transfers between your checking account and higher yielding savings or money market account.
Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.