There’s a reason so many older Americans are afraid to tap into their savings once retirement hits. After working so hard to build retirement savings, they worry about running out of money during their lifetimes. And if these signs apply to you, it means you may be at risk of that happening.
If you start your retirement without a plan to tap into your savings, you may eventually end up running out of money. A better bet? Work with a financial advisor to come up with a retirement strategy that’s right for you based on your needs and goals. Or do your own research and strategize yourself.
You may want to use the 4% rule as a starting point. The 4% rule states that you can withdraw 4% of your IRA or 401(k) balance during your first year of retirement and adjust future withdrawals for inflation. If you do this, your retirement savings will likely last 30 years.
However, this doesn’t mean you should stick to the 4% rule. A 3% withdrawal rate may make more sense for you, for example, because you retired early and need more than 30 years of income from your portfolio.
Or you may be able to withdraw more than 4% because of the way your assets are invested, or because you retired late. It is important to customize a strategy instead of following the 4% rule simply because it is popular.
It is generally wise to reduce your stock holdings once you retire to limit risk in your portfolio. But that doesn’t mean you should dump the stock completely, or even to a large extent.
The 4% rule assumes that you have a fairly equal mix of stocks and bonds in your retirement portfolio. But if you have 90% of your assets in bonds and cash and only 10% in stocks, your portfolio may not be able to generate enough income to allow for a withdrawal rate close to 4%. And in that case, you could run the risk of depleting your savings too soon.
Before reducing your stock exposure too much, sit down with a financial advisor or do some research to come up with a reasonable allocation. Holding 50% of your assets in stocks may not be within your comfort zone and you need to be able to sleep at night without constantly worrying about your investments. But you may find that a portfolio made up of 30% stocks, for example, is a reasonable compromise.