Will You Outlive Your Savings

How to make sure you're setting an adequate goal

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Ramona Henderson Pearson wants her family to join an exclusive club with 9 million members: The households in this club have a net worth of at least $1 million. A past president of the National Association of Black Accountants, the married mother of two heads The Pearson Group, a Detroit-based accounting and financial advisory firm. “My goal is to reach $1 million in liquid assets,” says Pearson, 54. “That should be enough for me to retire. I’m hoping to get there in about five years.”

At first blush, $1 million in liquid assets4cash, stocks, bonds, and mutual funds4may sound sufficient to ensure a comfortable retirement. But research shows that even seven figures in savings may fall short of providing retirees with the lifestyle they want. Retirement has changed dramatically in recent years, because Americans are living longer and are healthier and more active. According to the National Center for Health Statistics, African Americans who reach age 65 are expected to live 17.1 more years, and those who reach age 75, can expect another 11.4 years. So if you want your nest egg to help fund two or more decades of leisure and travel, you’ll need to do some careful planning.

First, consider how much you’ll need to maintain your lifestyle. Bill Bengen, a financial planner in El Cajon, California, conducted extensive research in the early ’90s to determine a “safe” withdrawal rate4one that would help ensure that retirees would not outlive their savings. Bengen concluded that a 4% withdrawal rate should be safe. That is, by tapping a portfolio for 4% of its value in the first year of retirement, and increasing that withdrawal rate by 4% each year to keep up with inflation, the portfolio should not run dry before 33 years and might last as long as 50.

Since then, Bengen says he’s altered his views somewhat. “For most of my clients, I recommend an initial withdrawal rate of 4.5% to 5%,” he says. It’s a matter of striking a balance. Some seniors may be able to front-load their withdrawals a bit and spend more conservatively in later life. As you grow older, perhaps past 75, you probably won’t spend as much on travel and other leisure activities as you did during your early retirement years. You’ll need to be prepared, however, for rising healthcare expenses. “If you go much higher,” Bengen says, “say to a 7% initial withdrawal rate, there’s a much greater chance of running out of money while you’re still alive.”

Vicki Brackens, a senior financial planner with MetLife in Syracuse, New York, says it was common in the past for advisers to recommend higher withdrawal rates. But now “people are living longer, so longevity has become a bigger factor in planning for portfolio distributions,” she says. “Greater market volatility also has made me more cautious.” She suggests, therefore, that clients plan on a 4% initial withdrawal rate.
But be sure to look at the numbers: Pearson would withdraw $50,000, or 5%, the first year of retirement; then $52,000

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