What rate of withdrawals on retirement assets should be used in planning?

When you are planning what your retirement income stream will be, advisors typically recommend factoring in a 4% annual withdrawal rate from your retirement assets. Presumably, this will ensure you will not deplete your assets over your remaining years.

Recently however, advisors have been rethinking this axiom. Experts now see two conspiring factors that make a 2.8% withdrawal rate as more appropriate. Those factors are:

1.] A longer life expectancy means you and I could be spending, on average, 30 years in our golden years. Therefore, we need to stretch out our savings by withdrawing less of it each year.

2.] Future investment returns could be lower than assumptions used to arrive at the 4% withdrawal rate. If for no other reason, taxes are expected to be higher for everyone as the US and state governments pay down massive accumulated debts and expanding budgets. This will eat into after-tax returns.

In terms of estimated savings needed to generate $50,000 of annual income in retirement, you need:

> $1.8 million using the 2.8% savings withdrawal rate, or
> $1.25 million using the 4% rate

The difference is significant. The solution is, of course, work longer and defer retirement plans.

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