A large portion of baby boomers and members of Generation X — the two age cohorts currently approaching or actually entering retirement — share a mistaken belief that could wreck their golden years.
About 20% of Generation Xers and 15% of baby boomers think a professional financial adviser would suggest withdrawing between 10% to 15% a year from a portfolio during retirement, according to a recent survey of more than 2,600 adults by Fidelity Investments.
Unfortunately, that number is off by a wide margin. In fact, for many years, the popular notion among financial advisers has been that you should draw down no more than 4% of your portfolio during your golden years.
And as we recently reported, some experts believe even 4% a year is too aggressive:
“Financial services firm Morningstar says the new rule of thumb should be that retirees withdraw no more than 3.3% of their portfolios annually. Today’s low yields on bonds and high equity valuations mean ‘retirees are unlikely to receive returns that match those of the past,’ Morningstar says.”
The fact that such a large share of near-retirees think they can safely withdraw 10% or more of their money annually suggests that millions of people may be in for a rude shock.
Even a financial adviser who is wildly optimistic about the future performance of the stock market would be unlikely to recommend anything close to a 10% to 15% withdrawal rate for those planning a long retirement.
Fidelity looked at 776 retirement periods of 28 years between the beginning of 1926 and the end of 2020 and found that, with one exception, in none of those periods could you have withdrawn more than 10% annually and had at least a 90% chance of your money lasting through retirement. Those findings were based on a portfolio that was 50% stocks, 40% bonds and 10% cash.
For instance, if you retired in 1982 — just as one of the greatest bull markets in history was starting — you could have safely withdrawn a little less than 10% and made your money last for a 28-year retirement. But even that golden period did not allow you to confidently withdraw 10% each year.
Fidelity said that over the timeframe of about one century, a 4.5% withdrawal rate would have lasted throughout a 30-year retirement in about 90% of the periods analyzed.
Needless to say, unless luck and fate are truly on your side, you need to dial down your expectations for how much you can spend during retirement.
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