Determining how much income to take in retirement

question I am often asked by people at or near retirement is “How much income can I take from my investments?”

No matter how wealthy a person is, everyone needs to have some idea of what they can spend without running out of money. From Mike Tyson to Larry King to Francis Ford Coppola, there are countless riches-to-rags stories that illustrate virtually everyone runs the risk of running out of money if they do not have their spending under control.

For decades, the “4 percent rule” was the default withdrawal rate recommended by investment professionals to clients who wanted to make certain they would not deplete their nest egg. The 4 percent figure is, primarily, based upon an influential study that was completed in 1998 known as the Trinity study. The study set out to determine “safe withdrawal rates” from retirement portfolios containing both stocks and bonds. One of the problems with the 4 percent rule is that interest rates have dropped so low. Today, many believe that investors should limit their income to a withdrawal rate of 3 percent then increase the income only if the investments go up in value. Although dropping the distribution from 4 percent to 3 percent may not sound like a lot, it translates to a 25 percent decline in spending.

One of the problems with the 4 percent rule is that it does not take into account one’s age. It stands to reason that an 80-year-old investor is less likely to run out of money than a 60-year-old, if they are taking the same income off of an investment. To compensate for age, one formula for determining a withdrawal rate is to divide your age by 20. For couples, use the younger spouse’s age. What this means is a person age 60 would take 3 percent (60 divided by 20) while someone who is 70 would take 3.50 percent (70 divided by 20).

My belief is that all of these rules are too simplistic. The fact of matter is there are many things to consider before deciding upon how much income can you take from your investments. Some questions you will want to answer include:

• Do you wish to leave part of your principle as an estate?

• Is their longevity in your family, and what about your own health or life expectancy?

• What proportion of stocks to bonds are you will- ing to hold?

• Are you able to reduce your withdrawals in the event of a market downturn?

• Do you have good health and long-term care insurance?

I will end this article with three pieces of advice. First, err on the side of caution. You do not want to go back to work if your investments take a downturn. Second, set aside the first two to four years of income in the bank or very conservative investments. This way, you won’t need to be so concerned about short-term downturns in the markets. One of the most devastating financial things that can happen for a retiree is to experience a severe market downturn just as he or she is beginning to take income. Lastly, take taxes into consideration if your withdrawals will come from an IRA or other retirement plan. You might be better off to draw down your other accounts because of the tax implications.

This article was written by Ken Levy, a CERTIFIED FINANCIAL PLANNERTM professional and a principal with Levy, Daniel & McGee Wealth Management. Wells Fargo Advisors Financial Network is not a legal or tax advisor. Investment products and services through Wells Fargo Advisors Financial Network, LLC Member SIPC. Levy, Daniel & McGee Wealth Management is a separate entity from WFAFN. Contact: 2111 W. Kettleman Lane, Ste. C, Lodi, CA 95242 or 209-263-0330.