A personal finance blog dedicated discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance.


Friday, January 28, 2005

Taking Money Out of Your Retirement

I spent some time last night running the numbers on a hypothetical retirement withdrawal strategy.

There are a number of ways to withdraw money from your retirement. All of them require you to make a decision as to how much money is necessary to support your lifestyle. The simplest way to make a withdrawal is to take a percentage of the account value out annually and leave the rest of the account to grow. So, if you have a bad year, you could possibly have to take a smaller amount out in the following years.

A more complex strategy is to figure out the amount of money you want to live on and make that your benchmark for year one. Then, each year, you add 3% (or the current inflation percentage) to that number to account for inflation. For example, say you require $50,000 the first year of your retirement. Here is what your annual income would like if you adjusted it for inflation:

Year  Income

2 $51,500
3 $53,045
4 $54,636
5 $56,275
6 $57,964
7 $59,703
8 $61,494
9 $63,339
10 $65,239
11 $67,196
12 $69,212
13 $71,288
14 $73,427
15 $75,629
16 $77,898
17 $80,235
18 $82,642
19 $85,122
20 $87,675

It is amazing, and a little scary, to see the impact of inflation (and, I used a modest inflation percentage). What this tells us is that in 20 years at 3% inflation, $87,675 will only be worth what $50,000 is worth today. So, inflation has a BIG impact on retirement plans.

So, with this example, you would simply withdraw the above amounts from your retirement plan each year, regardless of what the account is worth. Some years, you may even eat into the principal.

Tomorrow, I'll discuss another option for taking withdrawals.

Until then,...