Optimizing Your Post Retirement Drawdown Plan
Much debate has gone on in the personal finance community about the optimal amount you can withdraw from your nest egg in retirement so you don’t run out of money too soon. This is also applicable to you lucky folks who have been able to save well and retire early (or at least quit your day job).
The rule of thumb use to be 5%. Meaning you could safely take out 5% of your nest egg yearly without depleting your principle too fast or not at all over time. Lately investment gurus have been knocking that down to 4% which I believe is a pretty good idea given the current economy.
With that in mind I’ve come across a good plan of action to make your nest egg last as long as possible. Not sure where this originally came from but its sounds great to me.
In the good years when your portfolio returns 7% or more take out 4% and put 10% of that amount into CDs or similar investment. The idea here is to sell stock when it is high and to save a little for a downturn.
Conversely, in the not so good years, when your portfolio returns less than 7% per year use the CDs for living expenses until the market turns around.
Following this plan with hoping make your retirement plan more efficient and hopefully give you more of a sense of control over your finances.
Some additional notes and caveats:
- May need to revise the 7% figure based on current inflation
- This should be done on an annual basis although semi-annual would work too.
- When selling from your portfolio keep your stock mix in mind and sell more of what needs to be trimmed to keep your ratios in line.
- This idea also assumes you have started you retirement with a cash cushion to begin with. Usually a smart move.
Let me know what you think. Especially those who are currently living off their nest egg. Nothing like actual experience to prove a point right or wrong.
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