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Ask the Retirement Expert: Given the Volatility of the Market, Is It Still Okay to Pull 4 Percent From My Retirement Savings Each Year?

Amy Jamrog, CLU®, ChFC®, CASL® •  March 18, 2016 | Enjoying Retirement, Ask the Expert

Each week our Northwestern Mutual retirement experts answer your questions. This week’s question:

Given the volatility of the market, is it still okay to pull 4 percent from my retirement savings each year?

By Amy Jamrog, CLU® ChFC® CASL®

Amy has been a Wealth Management Advisor with Northwestern Mutual since 1999. She has achieved company, industry and community recognition since her first year in business. Over the past 16 years, she and her team have developed a specialty in helping baby boomers with retirement income planning.

Because of market volatility and the mix of positive and negative returns we have experienced in recent years, the 4 percent withdrawal rule is no longer considered safe to assume in your planning. We now recommend a very different approach to retirement income planning.

First, consider how much money per month you’ll need to meet your essential expenses (mortgage, bills, health insurance costs, etc.). Let’s say that number is $5,000 monthly after taxes. We’d suggest you work with a financial professional to determine how much of your investments and savings should be carved out to create a fixed and guaranteed $5,000 monthly check. This is typically achieved with a mix of Social Security, a pension if you still have one, or an annuity. Because these sources typically provide guaranteed income, you won’t have to worry about the volatility of the market for this portion of your spending.

This strategy allows you to keep the rest of your money invested in more growth-oriented places, like investments. Your investments can be used to pay for non-essential expenses such as fun, vacations and gifts each year—and you can make these spending decisions annually based on the market return that year.

This is an overly simplified way to discuss this kind of planning. It’s a good idea to work with a financial professional who can help you build a retirement income plan based on your situation.

Annuities are offered by life insurance companies and generally considered as long-term financial products. Withdrawals from annuities may be subject to ordinary income tax, a 10% IRS early withdrawal penalty if taken before age 59 ½, and contractual withdrawal changes.

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