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If 2027 is your retirement goal, you may find yourself getting more excited and anxious each day. But one of the most important things you can do to prepare for a secure retirement is to plan your withdrawal strategy in advance.
Here’s how to establish a year-one exit strategy to get off to a good start.
Estimate the necessary expenses
If you have a year left until retirement, by now you should have a good idea of what your bills will be. This does not mean that you can estimate your expenses in dollar terms. However, you should at least be able to make a rough estimate and create a budget to stay within your spending limits.
Figure out what sources of income you have
Your IRA or 401(k) may not be your only source of retirement income. Depending on your age, you may be eligible for Social Security benefits when you retire in 2027. If you plan to receive your benefits soon, you won’t need to withdraw as much from your savings to meet your spending needs.
Or perhaps you plan to work part-time or consult in your previous field after retirement. Add up your non-retirement account income to see the amount and calculate your withdrawal amount.
Let’s say you estimate your monthly expenses for the first year of retirement to be between $6,500 and $7,500. If Social Security pays you $2,500 a month, and you think you can earn $1,000 a month working part-time, that means you’ll need to withdraw $3,000 to $4,000 from your savings each month to cover your expenses.
Make sure your withdrawal rate is safe
Once you’ve crunched the numbers and found out how much you want to withdraw from your savings, you need to make sure it’s a reasonably suitable interest rate, given your age and investment mix.
For this example, let’s say you decide to withdraw $4,000 per month, or $48,000 per year, from your IRA or 401(k). If you have $1.2 million in savings, your withdrawal rate would be 4%. This may make sense if you retire at a fairly typical age (say, around your 60s) and have a fair mix of stocks and bonds in your portfolio.
However, if you only have $900,000 in savings, your withdrawal rate on $48,000 would be 5.33%, which may be a little high. At that point, we recommend returning to the lower end of the range. If you withdraw $3,000 a month, or $36,000 a year, you’ll get 4% of your $900,000 nest egg, which is much more secure.
pay attention to market trends
If the market crashes early in retirement, your savings can be severely damaged. If you have to lock in portfolio losses early, you can increase the risk of depleting your nest egg during your lifetime.
Therefore, it is necessary to pay attention to market trends. If you’re on the decline, it’s generally wise to cut back on spending to minimize portfolio withdrawals or shore up other sources of income. In this example, you would probably aim to reduce your spending by 10% to 15% or increase your part-time or consulting hours to relieve pressure from your heavy workload.
Of course, this is not to say that retiring to a bad market next year is guaranteed. Rather, the point is that it’s generally best to be flexible when it comes to withdrawals from your retirement plans, so that market downturns don’t derail your long-term plans, especially early in retirement.
Also, if you plan to retire in 2027, now is a good time to move some of your assets into cash. Ideally, you should have enough cash to cover your living expenses for about two years. This allows your investments to remain untouched during extended market downturns.
By having a solid first-year withdrawal strategy in place, you can truly set yourself up for a financially secure retirement. Consider your spending needs, income sources, and market conditions to find the right approach. And remember that strategies can evolve over time. But if you prepare properly at the start of retirement, you’re less likely to run out of money once you retire.
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