Your nest egg’s longevity depends on how much or how often you contribute to it during your working years, the strength of your investments compared to inflation rates over time, and the amount you plan to withdrawal from your retirement savings. You cannot predict exactly when your retirement will kick in or the ups and downs of the markets. You can get an idea of how long your nest egg might last by determining how much you plan to withdraw each year.
How Much to Withdraw
A 4-percent withdrawal rate each year from retirement savings has often been suggested when considering inflation and purchasing power for savings to last 30 years. You can then increase the withdrawal rate in the years that follow. You might want to withdraw 3 percent when you first start taking money from your nest egg, given the unpredictable nature of the markets and the economy. You could take out as much as 6 percent annually if your nest egg has been performing comfortably. For example, if you have $1 million in your nest egg for retirement, you could be taking out $30,000 to $60,000 a year, depending on the 3- to 6-percent calculation.
You can get a good idea on how long you can stretch your nest egg by figuring out about how many years you would like for necessary withdrawals through online calculators. Enter the nest egg balance along with annual rate of return, withdrawals each year, projected annual inflation rates, and the number of years expected for withdrawals. Look at your future through several different scenarios during good or bad times, taking into consideration income drawbacks or uncertain economies. Examine what things might be like in the next 30 years under different circumstances when taking out from 3- to 6-percent of your savings.
Rate of Return
If you have $1 million in your retirement fund and you project a 3-percent rate of return, you can take out $4,216 a month for 30 years, or $5,546 for 20 years, according to the American Federation of Government Employees. A rate of return of 5 percent on that balance would mean you could withdraw $5,368 monthly for 30 years, or $6,600 for 20 years. A $500,000 balance at a 3-percent rate of return means you could withdraw $2,108 per month for 30 years, or $2,773 for 20 years.
You can stretch your savings to 40 years or even more, depending on the success of your investments or how much you need to withdraw for a comfortable lifestyle. Investing more money in your retirement account now while you have extra income helps ensure a strong nest egg. Draw from taxable accounts before taking any money out of qualified retirement accounts, such as an IRA or 401(k), which continue to increase in value tax-free until you take the money out.
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