Financial advisers say a sustainable annual withdrawal from retirement savings is 4%. With a million-dollar nest egg, a 4% drawdown means annual income of $40,000. And that’s before taxes.
If you stick with the 4% withdrawal rate and earn an average 8% on your money annually, you’ll be in good shape for the long run. (Over time, a mix of 60% stocks and 40% bonds has returned about 8% a year.)
But can you really live on $40,000 a year? Most millionaires don’t want to. “If you are 45, 50, 55 years old and spend like a millionaire, then you are doing two things with your money that may well not work for you long term,” says Tom Davison, a financial planner in Columbus, Ohio. “The first is not saving extra dollars now, and the second is establishing a lifestyle cost that, for most people, will be hard to cut back on later. Together, these two are a double-whammy on long-term financial success. And you compound the problem if you go around acting like a millionaire to build your social circle.”
To be clear, let’s say you pull $100,000 a year from your savings, you earn 8% a year, and you don’t adjust upward for inflation. Here’s how your account will fare (values are what you have left at the end of each year):
- Year 1 $972,000
- Year 5 $835,735
- Year 10 $594,376
- Year 15 $239,741
- Year 18 $0
Yup — broke in retirement.
SEE ALSO: 8 Urban Myths of Personal Finance
8 Worst Things About Being a Millionaire
No comments:
Post a Comment