Smart Ways to Tap Into Your Retirement Savings
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Here's your money briefing for Thursday, October 7th. I'm J.R. Whelan for The Wall Street Journal. We often talk about how important it is to save for retirement and whether your retirement savings are made up of a 401k, an IRA, Social Security, or a combination of all of those. What's equally important is mapping out how and when to withdraw those funds when you need them.
I think it's important to look at how your nest egg is performing from year to year. And if we're going through some tough years, I think it's important to adjust your withdrawals to account for that.
Glenn Rufenack answers WSJ reader and listener questions about retirement issues. Lately, he's been tackling the smartest ways to approach retirement savings withdrawals. We'll check in with him for some answers after the break.
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My pleasure. So Glenn, you know the goal of anyone saving for retirement is to be sure to have enough money and not run out in your later years. But it's really not a simple thing to figure out, right?
Now, that's right. It all comes down to how you pull this money out of your savings. And there's many ways to do that. One approach is to divide this into two goals, if you will. You can, first of all, establish a secure base of lifetime income, you know, Social Security, pensions, annuities, reverse mortgages. And then if you have that secure base of lifetime income, that's going to cover your essentials, shelter, food, health insurance. And then you can say, okay, I need a way of pulling money out of my nest egg. And if you have that secure base of lifetime income, it makes that second part, pulling money out of your nest egg, a little bit easier to cover things like travel, to cover the, I guess, the more fun parts of retirement.
All right, so let's talk about some of the ways that people can start withdrawing money from the retirement account. One method we often hear about is the 4% rule. What exactly is that?
It's a method established by a financial advisor named William Bengen back in the 1990s. And it says very simply, the first year of retirement, you withdraw 4% of your retirement savings, 4%. And then the second year, you take that amount plus a little bit more to account for whatever inflation might be. But the point is, you're starting off with a particular number, that 4%, and then you're adding to that each year to account for inflation. The 4% rule is popular among investors because prior to the research, there were really no good figures out there about how much people could safely withdraw from their nest egg. Could you take out 10%? Could you take out 2%? How much could you take out and know that your nest egg would last 20 or 30 years?
And so Banken, Bill Banken, does some really nice research, and he establishes that you can pull about 4% from your savings every year in retirement, and you will not outlive your money. That's a very simple way to put it. But that figure really took the industry by storm.
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