Two factors may determine how comfortable your retirement will be: the amount of money you saved before retiring and how quickly you spend those savings after you retire. Your annual withdrawal rate from personal savings and investments can help you determine how long these assets will last and whether they can generate a sustainable income stream over the course of your retirement.
The following factors affect your annual asset withdrawal rate during your retirement:
1. Age and Health
As you build your retirement budget, take your age and overall health into account. While the average life expectancy in the United States is 78.8 years, you cannot base your withdrawal estimates on the average life expectancy alone. Consider your family health history and longevity.
Inflation accounts for prices increasing over time. To account for the impact of inflation, include an annual percentage increase in your retirement income plan. How much inflation should you plan for? Although the rate varies from year to year, the U.S. consumer price inflation (CPI) has averaged under 3% over the past 30 years. You can assume that inflation would average in the range of 3% to 4% a year, however, inflation can spike after you retire. Historical CPI data reveals that prices have jumped as much as 18% from year-to-year. You may need to adjust your withdrawal rate to reflect the impact of higher inflation on both your expenses and investment returns.
3. Variability of Investment Returns
When considering how much your investments may earn over the course of your retirement, you might base your estimate on historical stock market averages. However, once you start taking income from your portfolio, losses affect your income more, as you no longer have the luxury of time to recover from those losses. While it’s possible that your portfolio will not experience any losses and might even experience some gains, it is safer to assume some setbacks will occur.
If you want to make sure your retirement plan takes all potential income variables into account, review your retirement plan and budget with a Fifth Third Bank financial advisor.