You spend your working life building up retirement assets such as your 401k and IRA, but what you do next can be just as critical. How you handle the withdrawals from your 401k can have a big impact on your quality of life, and on how long your money will last. Looking at your 401k balance as part of a larger overall picture will help you find a withdrawal rate you can live with.
Things You'll Need
- 401k statement
- IRA statement
- Personal account statements
Review a copy of your most recent 401k statement. If you have online access to your account, you can check the exact balance. Knowing how much you have to work with with makes budgeting the money easier.
Check the balance on your IRA and other accounts earmarked for retirement spending. Review the performance of those accounts and determine which one you will roll your 401k into when you retire. Rolling your money into an existing IRA will make it easier to manage, since you will have one large nest egg to work with.
Add up all the sources of income you expect to have in retirement, including Social Security, company pensions and income from part-time employment. If you are already collecting Social Security, you can plug a firm number into your calculations, otherwise you can use the estimate provided by the Social Security Administration each year.
Review your personal budget to see how much you are spending. If you are not yet retired, you will have to look at spending categories that might go down, like the cost of commuting and lunches out, as well as costs that might increase, like expenses associated with your favorite hobby.
Compare the amount of guaranteed income you can count on in retirement to the monthly expenses you expect to have. If you have enough to meet your needs, you can keep your 401k withdrawals to a minimum in the early years of your retirement. This increases the odds that the money will last your entire lifetime. If you have a shortfall, you will need to determine how much you need to pull from your 401k balance each month.
Annualize your monthly shortfall by multiplying the monthly figure by 12. For instance, if you need $1,000 more than your pension and Social Security will provide, you would use a figure of $12,000.
Divide that annual figure by the balance in your 401k and multiply the result by 100 to get the withdrawal percentage. For instance, if your 401k has a balance of $250,000 and you need to generate $12,000 per year in extra income, that is a 4.8 percent withdrawal rate. Keep in mind that a withdrawal rate higher than 4 to 5 percent can increase the odds you will run out of money. An initial withdrawal rate of 4 percent is recommended in the first year. In years 2 and beyond, that withdrawal rate can be adjusted upward, based on the inflation rate. That preserves the purchasing power of the portfolio without significantly increasing the risk it will be depleted early.
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