Susan Tompor: Baby boomers need to figure out how much to spend in retirement
Three things can dictate how much retirees spend each year in retirement: their time-horizon, their tolerance for risk and how much of a guarantee they want that their money will last through their lifetimes, according to Colleen Jaconetti, senior investment analyst for the Vanguard Investment Strategy Group.
Someone who is going to need money for 40 years or more, she said, is at greater risk if they want to withdraw 4 percent or more in a year in retirement. But someone who retired later and needs the money for 10 years might be able to withdraw closer to 8 percent or 10 percent in a year.
Vanguard, she said, focuses on telling retirees to steer clear of thinking there is one correct withdrawal rate for everyone. The 4 percent rate takes into account a 50-50 mix of stocks and bonds; a 30-year time horizon and an 85 percent success rate that the money would last through retirement, she said.
Vanguard also has a calculator online that can help retirees determine how much to spend in retirement.
One mistake retirees can make, Jaconetti said, is to let their income from dividends and interest dictate their spending. If so, there could be a greater temptation to shift from a balanced portfolio and take on high-risk investments, such as high-yield bonds. Retirees might be better off tapping into some capital appreciation in given years, instead of taking on more risk.
Baby boomer retirees and those four or five years from retirement need to calculate how they’re going to generate a paycheck in retirement. But they also need to review what they’re spending and what adjustments they can make early in the game.
Grandy and his wife put a tighter control on their spending, recognizing that his mother is in her 90s now. The impulse spending had to stop for that money to last. Now, he’s making extra spending money as an artist, doing work in clay and creating laser paper sculptures. The couple focuses on doing things with their 9 grandchildren, soon to be 10, instead of lavishing them with gifts, too.
“We don’t know how long we’re going to live,” Grandy said. “We don’t know how long we’re going to need our money. Who knows the future of anything?”
ABOUT THE WRITER
Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at firstname.lastname@example.org.
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