As retirees shift their focus from accumulating assets to creating an ongoing stream of
income, many are not prepared to start planning from a new vantage point. This
lack of perspective may explain why, according to a recent survey, many
retirees anticipate making annual withdrawals that are too large, and run the
risk of outliving their assets.

How Much to Withdraw

Historically, financial advisors have recommended that retirees limit annual withdrawals to a
maximum of 3% to 5% of assets, adjusted for inflation, to limit the chances of
running out of money. Yet a recent survey indicated the following:¹

• Nearly one-third of respondents believed they could withdraw between 7% and 10%
  annually.
• Just over 10% anticipated that they could withdraw between 11% and 15%.

Many respondents also underestimated the percentage of their preretirement income
they would need annually to pay for living expenses. Only 45% of respondents
understood that retirees typically need between 80% and 90% of preretirement
income to maintain their preretirement standard of living.

Factors Affecting Retirement Income

If your retirement assets are running short, a variety of
factors are likely to influence how much you will need during your later years:

• Your retirement age. Collecting Social
  Security at your earliest opportunity, which for most people is age 62, results
  in a permanent reduction of between 20% and 30% in the amount of your monthly
  benefit.
• Medical expenses. It's no secret that
  Medicare is experiencing financial stress and employer-sponsored health care
  plans for retirees are less generous than they formerly were. The Employee
  Benefit Research Institute has estimated that a couple retiring at age 65 with
  median drug expenses would need to accumulate $271,000 to ensure a 90%
  probability that they will have enough to pay for medical care. This amount
  does not include the cost of long-term care, which would make the estimate even
  higher.
• Housing. A large mortgage or other
  indebtedness limits financial flexibility. If you live in spacious quarters,
  consider how you will be able to finance mortgage payments, taxes, maintenance,
  utilities, condo fees, and other expenses.
• Discretionary costs of living. It can
  be difficult to control expenses for necessities such as utilities and health
  care. But variable costs, such as restaurant meals and vacations, are a
  different matter. Review how you may be able to trim variable costs before you
  retire without leading a Spartan lifestyle. Getting used to a more efficient
  mode of living may help you in your transition to retirement.

Source/Disclaimer:

¹ Source: MetLife, Met Life Mature Market Survey,
October 2011.

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November 2011 — This column is provided through the Financial
Planning Association, the membership organization for the financial planning
community, and is brought to you by Ronald J VanSurksum, CFP® , a local member
of FPA.

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