During this blog's recent discussion of "how much is enough" to safely retire, one of my readers correctly pointed out that if, instead of using a first-year withdrawal rate of 4% or 3% you used a 2.4% rate, you would be virtually assured of never running out of money over a really, really long retirement span. A span most people wouldn’t even live all the way through. The result over most reasonable lifespans is that you would not only die with money, you would likely die with more money than you even started with.
That is indeed a very safe approach.
When you aim for any of these first-year withdrawal rates, you can back into the amount your nest egg would need to be by dividing the withdrawal percentage into 1. For example:
A 4% withdrawal rate (1/.04) = nest egg multiple of 25 times expenses*
A 3% withdrawal rate (1/.03) = nest egg multiple of 33 times expenses*
A 2.4% withdrawal rate (1/.024) = nest egg multiple of 42 times expenses*
*Again, to prevent any major heart attacks, the multiple above at is the multiple of your annual retirement budget that is not already covered by other income sources like Social Security or pensions. You just need the nest egg to support the spending that will not be covered by some other income source. This is the portion of your retirement savings that you are ultimately responsible for.
For example, if you plan on starting out with a $50,000 spending level when you retire and your Social Security checks will total $20,000 per year, you’d need to multiply the difference, $30,000, by whatever multiple above, that achieves your desired withdrawal rate.
Clearly, the higher your multiple is, the safer you will be in retirement, and the more money you will likely leave to heirs.
For most folks though, the prospect of saving 25 or 33 times your desired spending is daunting enough. To reach the hurdle of 42 times my retirement budget, I would have had to work many, many more years. And what would I get out of it? When I die, I’ll have a nest egg that could be even larger than what I began with.
Which is a problem for me, because for all those extra years on the job, I’m rewarded with a bunch of money I can’t use anymore. Because of course, I’m dead.
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