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Don’t let this mistake ruin your retirement

Recently, while enjoying a holiday party, a friend was talking to me about her plans for retirement, in hopes, naturally, of getting some free advice. I’m always happy to help out my friends, but the advice I gave was not quite what she had expected to hear.

 Helen is a single nurse in her mid-60s. She said to me, “I have $300,000 in my 403(b) retirement account, and I have to have an annual income of around $25,000 a year in addition to my Social Security. I ought to be OK if I take out that amount every year, shouldn’t I?”

 Doing the arithmetic in my head, I quickly realized that she would be withdrawing from her retirement account at a rate of over eight percent per year. What was my response? “At the rate you’re proposing, you will probably run out of money during your lifetime, most likely when you reach your 80’s. I understand you’re healthy, and that there is a very good chance you might even live well into your 90s. You will be better off by beginning with a more moderate withdrawal rate of only four percent per year, and then, down the road, if your investments do well you could increase your withdrawals at that time. This would mean you should start out by withdrawing only $12,000 per year.”

 And her response? “No way I can live on $12,000 per year!”

 I went on to say, “If you live into your 80s and deplete your retirement savings, then you will end up living on just your Social Security. So you must consider your retirement account as a kind of generator of lifetime retirement income and conclude how much income will be reasonable to expect from your savings.” I encouraged her to learn more and suggested she check her local library for books on managing her own retirement income.

 Helen’s story, unfortunately, is all too typical of the kind of financial “planning” so many people do for their retirement years. They generally estimate the amount of money they should need each year for total living expenses, over and above their Social Security income. If theretirement savings they have put aside are somewhat bigger than this annual amount, then they believe they will be fine.


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