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Wednesday, August 22, 2007

How much amount to withdraw during retirement?

The CNNMoney.com article discusses the use of the 4 percent withdrawal rule when it comes to saving for the retirement. The question that came up was:

"I've read that if I withdraw roughly 4 percent of my retirement savings each year to live on, my money will last virtually forever. But does this 4 percent include the money my portfolio already kicks off in dividends and interest? Or is the 4 percent withdrawal on top of that?"

The articles says that the 4 percent withdrawal amount applies only to the percentage of your savings that you withdraw the first year of retirement. In the subsequent years, this dollar amount can be increased for inflation each year, so as to maintain your purchasing power throughout retirement. In addition, the 4 percent plus subsequent increases for inflation also include dividends and interest.

"So, for example, if you have $1 million in your 401(k), you would pull out $40,000 the first year. If inflation were running at, say, 3 percent a year, you would increase that amount to $41,200 the second year, roughly $42,400 the third year and so on."

However, as per the article, the 4 percent withdrawal rule is simply only a general guideline and not a rule that applies to every situation or guarantees the best retirement.

For complete article, see:

CNNMoney.com: Retirement: The 4 percent solution

posted by Ruby @ 12:57 AM

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