Congratulations! You’ve finally retired after building up a steady nest egg over a number of years. As you shift gears from saving to spending, it’s important to make the most efficient moves possible so that your nest egg can last well into the latter part of your golden years and beyond. Of course, a top fear is running out of money once you’re in your 70s or 80s in retirement. And though you’ve begun to crack open your retirement nest egg, there are still a handful of ways to ensure it lasts.
Also, if you’ve got a substantial sum and the willingness to take risks in the equity markets, you may just be able to keep growing your retirement nest egg, perhaps by enough to leave a generous amount to your heirs. In this piece, we’ll go over a few ways to draw the cash coming from your passive income portfolios.
As always, consult a certified financial planning pro if you’ve yet to formulate a retirement game plan. They can take care of asset allocation and fine-tune a passive income plan that works best for your lifestyle and your longer-term financial goals. Even if you’ve got a post-retirement roadmap in mind, I still think getting a second opinion from a pro can never hurt!
Without further ado, let’s check out a few popular and wise rules as your nest egg begins to work for you for a change!
The good, old-fashioned “4% rule.”
The “4% rule” is probably the withdrawal rule of thumb you’re most familiar with. Indeed, it’s a benchmark for many retirees and one that (mostly) eliminates the fear of running out of money in retirement. The popular strategy entails taking out 4% of one’s portfolio.
Of course, subtle adjustments for inflation (or deflation, if ever it ends up happening!) can be made in the following years. It’s a pretty simple strategy that many experts may recommend as a fine middle ground for retirees. And while it’s a quick-and-easy go-to solution, it may not be the best for you, especially if you’re just retired. If you’re in your early 60s, 50s, or even 40s, you may wish to deviate by a percentage point or two from the 4% rule.
Other systemic withdrawal strategies
Indeed, younger retirees may have heftier budgets today and slimmer ones as they age. At the same time, younger retirees may have longer to live and should, therefore, err on the side of caution. In any case, going for the more aggressive 5% or more conservative 3% withdrawal can make sense.
Of course, some of the more aggressive opinions out there, like those of guru Dave Ramsey, believe you can crank up the withdrawal percentage well above 4%. He views the “4% rule” as too conservative, arguing that doubling it to 8% can be an effective move if a retiree is all-in on stocks.
It’s a controversial move by many experts, especially given that retirees tend to shift gears from stocks to bonds. Finding the right (and safe) figure for you is essential, given your lifestyle and asset allocation. As always, no one-size-fits-all solutions fit every personal finance situation!
Some of the more conservative gurus out there may recommend an ultra-conservative withdrawal rate closer to 2%. Indeed, it may be safer in the face of market unknowns, but the odds are high that you’ll be leaving a lot of money on the table. If you plan to leave plenty behind for the children, perhaps erring on the side of a lower withdrawal rate can make sense.
Interest-only withdrawals
Finally, if you’ve achieved a supersized nest egg, you may be fortunate enough to live off just the dividends or interest of your investments without having to touch the principal. And as you age and your expenses naturally drop off, perhaps you’ll only spend a small percentage of the interest from investments. Indeed, living off the interest, not the principal is ideal, but tough to achieve for most who don’t have an incredibly high net worth.
Though toughest to achieve, I do view interest-only withdrawals as the best way to go. You’ll be able to have your cake (continued growth of your portfolio) and eat it, too (as you live off dividends, interest, royalties, distributions, or even rental income in retirement).
Be mindful of taxation
Finally, be mindful of taxes if you’re drawing down from registered accounts. Contacting a tax pro on the matter could pay dividends as you are ready to enjoy your retirement!
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