Create a budget estimating how much money will be needed to cover retirement living. Include recurring expenses such as utilities, taxes, gas and other transportation costs, medical expenses, insurance payments and mortgage or rent. Do not forget to take account of groceries, household supplies, clothing, entertainment, gifts, holiday and vacation expenses.
On Jan. 1, 2011, 10,000 baby boomers celebrated their 65th birthday. Ten thousand more will celebrate it every day for the next 19 years; by 2030 the entire boomer generation will be senior citizens. Adjusting from wage earner to retiree generates a range of financial issues. Individuals must figure out how much money can be withdrawn from savings yearly without eventually running out of money.
Estimating a Retirement Withdrawal Rate
List all sources of retirement income. The Social Security Administration sends future recipients a yearly document estimating potential payments. Add up income from all sources such as pensions, annuities, rental income and Social Security for a total income amount.
Subtract retirement income from the budget estimation. The result is what will have to be withdrawn from savings to cover expenses.
Compute the total of all personal savings, investment and retirement accounts. Include taxable savings accounts, brokerage accounts, IRAs, 401(k)s and other qualified retirement plans and any other savings and investments.
Compute the percentage of funds to be withdrawn from savings to cover expenses. Divide the unfunded expense amount by total savings, then multiply by 100 to express the result as a percentage. The formula is: unfunded expense/total personal savings times 100 equals the withdrawal percentage. A large percentage means expenses need to be pared and steps taken to downsize lifestyle; otherwise the money will run out. Financial planners generally recommend about four percent of savings be withdrawn initially.
Reevaluate withdrawal rates when there are changes in your life situation, the value of your accounts and tax laws.
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