Saving for retirement is a big deal for Americans. Most of us save for decades to prepare for our golden years. Maybe you dream about finally having the time to go on vacation. Perhaps there are a lot of hobbies you’ve been meaning to get into. While it’s easy to have our ideal retirement planned out, there’s something we’re missing.
Thinking ahead is great, but it’s not effective if you’re not sure HOW you’re going to do it. If you’ve been contributing toward your 401(k), how do you plan on distributing that money? According to a new poll from Kiplinger, that’s a question half of us don’t ask. 50% of people between 35-64 said they had no withdrawal plan. This part is key in true retirement planning.
“Americans are often focused on, what’s my number or how much do I need to save by the time I’m 65, 66 or whenever you decide to retire,” says Mark Solheim, editor, Kiplinger’s Personal Finance. “Unless you are deliberate about how much money you are withdrawing every year and you watch those totals and what the market is doing, you are shooting in the dark.”
Why You Need a Retirement Plan
So many retired folks are dealing with running out of money sooner than they anticipated. It was found by the Employee Benefit Research Institute that very few people know what they’ll need. They surveyed over 2,000 workers and found only half of them had any inkling what they would spend during retirement.
If you don’t know what you’d spend each month, how can you properly save? That’s leaving too much to chance. Furthermore, only 1-in-8 said they knew how to withdraw their retirement income in the first place. It goes to show a lot of Americans are unknowledgeable about their future and how they’ll pay for it.
“You don’t want to use the money too quickly,” says Solheim. “Another odd thing that we found is that people actually way underspend what they are able to spend. Having a firm, logical withdrawal plan helps you spend the right amount of money so that you have a comfortable lifestyle.”
The 4% Rule
“The 4 percent rule is widely accepted among financial planners,” he says. “It’s actually been tested under various scenarios of stock market fluctuations. Bear markets and bouts of high inflation. In your first year of retirement, you withdraw four percent from your nest egg. Most people’s nest eggs are in tax-deferred accounts – a 401(k) or IRA. Every subsequent year you adjust that for the rate of inflation. It’s been shown statistically your money is very likely to last 30 years.”
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This is a great strategy for anyone looking to save for retirement. You can change the percentage to reflect the current market fluctuations at the time, but it works well.
“If the market tumbles, the amount of money in your account goes down and your withdrawal will decrease as a result,” he says. “Then you might need to make up some of that money somewhere else. You need to know where that money is coming from.”
