If you’re thinking about retirement, you’ve undoubtedly wondered how your savings and investments will supplement your retirement income. 

A landmark study conducted in 1994 by financial planner William Bergen attempted to answer this question. His study reviewed all rolling 30-year periods dating back to 1926 and determined that retirees holding a balanced portfolio consisting of 50% equities and 50% fixed income could safely fund a 30-year retirement by withdrawing 4% of the starting account balance, then adjusting that dollar amount each subsequent year to account for inflation. The “4% rule,” as it came to be known, has guided retirees since then.

However, research conducted by Morningstar in 2022 concludes that low bond yields since 2002 may not support the 4% rule, and retirees should target a 3.3% initial withdrawal rate instead.

Each retiree’s situation is unique, so 3.3% or 4% should only be considered as a starting point. Do you want to leave a financial legacy? Other factors such as life expectancy, total wealth accumulation, personal lifestyle preferences, appetite for risk, long-term care plans, and retirement goals, as well as the prevailing market conditions, each play a role in determining a safe withdrawal rate.

Regardless of your unique situation, here are several considerations that all workers and retirees can think about:

Maximize Your Contributions If You Are Still Working

If you are still working and find yourself in the position of having underfunded your retirement accounts, you still have time to improve your situation. Get aggressive by maxing out your 401(k) contributions each year. You can also consider adding funds to a traditional or Roth IRA. If married, be sure your spouse is doing the same.

If you still have resources available after fully funding your retirement accounts, consider opening an after-tax investment account. Doing so will give you more options and flexibility on where to pull retirement income from. If your plan includes buying a second home, this account might be the best place from which to pull funds. 

Consider Working for Longer or Working Part-Time

Pushing back your retirement date allows you to save more in your retirement accounts while giving your money more time to grow. Additionally, delaying Social Security benefits, pension or annuity payments can increase your lifetime payouts. Another option is to continue to work part-time in retirement. Part-time income will enable you to withdraw less from your retirement accounts to meet your cash flow needs.

If You Are Retired, Budget and Spend Prudently

We like our clients to split their expenses into two categories. The first is essential living expenses, such as medical costs, prescriptions, utilities, groceries, and property taxes. The second category includes all the things that make for a wonderful life, such as vacations, gifts, meals at restaurants, and entertainment. Make adjustments to the second category if you are having a hard time limiting your spending to 4% of your retirement savings.

Consider Downsizing Your Home and Your Toys

If you are not using all the space in your home, consider downsizing to something smaller and easier to care for. By downsizing, you may save on costs such as maintenance, taxes, and utilities. If your active lifestyle has left you with lots of toys that you no longer use, consider downsizing those as well!

We are living much longer and healthier lives than our parents and grandparents did, and we continue to benefit from new advances in medicine and medical treatments. According to the Social Security Administration in a January 2022 publication, once a couple makes it to age 65, there is a 50% chance one of the two will live past age 90. Thoughtful planning and careful due diligence is needed in setting your withdrawal rate to ensure the retirement savings you’ve worked hard your whole life to save lasts for your longer, healthier retirement.

At Kletschke Wealth Management Group, we work closely with our clients to help them make these important decisions. Contact Kim or Korey for a complimentary review of your retirement portfolio!