Shifting from Earned Income
to Retirement Income
For many
retirees, cash flow planning becomes as
important as investment planning. So after
calculating the amount you will need to maintain
your standard of living in retirement—usually
about 75% to 80% of your current salary—and
allocating your assets properly, you’ll want
to determine how much money you’ll be able to
withdraw from your nest egg to cover your
day-to-day expenses.
To estimate how much total income you
will have in retirement, you will need to
consider various factors, including how much you
have saved for retirement; how much income you
will receive from Social Security, a pension, or
other sources; and whether you will be employed
part time. As you would expect, the more
conservative your spending plans are, the
greater the possibility that you will not
deplete your assets too soon.
How Much Can I Withdraw?
Generally
speaking, withdrawing 4% of your investments
(pretax) in the first year of
retirement—adjusted annually to keep pace with
a projected inflation rate of 3%—is a good
place to start. This should enable you to have a
high likelihood of not running out over a
30-year period (generally, we recommend to age
95). At the same time, you will have the
flexibility to increase or decrease your
withdrawals from one year to the next, depending
on your personal situation and current market
conditions. Combining an appropriate initial
withdrawal amount with expected income from
other sources will help you understand the
overall lifestyle you may be able to afford in
retirement. To obtain a more detailed picture of
your own financial situation in retirement,
access our complimentary tool at www.troweprice.com/ric.
Draw Down Taxable Assets
First
Once you’ve
determined how much you’ll be able to withdraw
each year from your investments, be sure to do
so in a tax-smart way—typically preserving
tax-deferred assets as long as possible.
Consider selling from taxable accounts first,
tax-deferred accounts next, and tax-free
accounts last. This enables the money in your
tax-advantaged accounts to stay invested longer,
which could potentially increase your overall
after-tax income in retirement.
