Many of us spend much more time thinking about saving for retirement and working on amassing a sufficient nest egg than we do thinking about things that matter in retirement. Such topics include how we'll withdraw funds from our accounts in a manner that will keep us from running out of money too soon.
One major factor in how quickly our nest egg gets depleted is where we live. Here's a look at how your home state plays a big part in your future financial security, along with some thoughts on withdrawal strategies.
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Your retirement plan
Each of us needs to come up with a solid retirement plan. That means taking some time to figure out how much we'll need in retirement -- and how we'll amass that sum.
One good thing to do is to set up multiple income streams for your retirement, so that if one shrinks or disappears, you can still rely on the others. (For example, Social Security benefits in the future may be smaller -- and the program is facing some challenges from the Trump administration as well.)
These income streams might include Social Security, withdrawals from retirement accounts, dividend income, interest income, rents from investment properties, income from part-time jobs, and annuity or pension income, as examples. Delaying your retirement by a few years can be a powerful move, too.
Have a smart withdrawal strategy
Once retirement starts, you shouldn't be withdrawing as much as you need from your retirement coffers, hoping they'll last. Remember, you may well live to 90 or 95 or beyond, and if you retire at 65, that's 25 or 30 or more years that your nest egg will need to support you.
Fortunately, there are a variety of retirement withdrawal strategies to consider using. A well-known one -- the 4% rule -- is flawed but still instructive. It will have you withdrawing 4% of your nest egg in your first year of retirement and then adjusting subsequent annual withdrawals for inflation.
The table shows what a 4% withdrawal would be for nest eggs of various sizes:
|
Nest Egg |
4% First-Year Withdrawal |
|---|---|
|
$100,000 |
$4,000 |
|
$250,000 |
$10,000 |
|
$300,000 |
$12,000 |
|
$400,000 |
$16,000 |
|
$500,000 |
$20,000 |
|
$600,000 |
$24,000 |
|
$750,000 |
$30,000 |
|
$1 million |
$40,000 |
Data source: Author calculations.
Another approach, if your nest egg is big enough, is to aim to not withdraw from it and instead to live off of the dividends and/or interest it generates. If, for example, you have a $750,000 stock portfolio with an overall dividend yield of, say, 4%, you're set to collect $30,000 annually -- and dividends of healthy and growing dividend-paying companies tend to be increased over time.
Where you live matters
So perhaps you're set to collect $30,000 per year from Social Security and $30,000 from your investments, and maybe you've bought a fixed annuity that will pay you $10,000 per year, too. That's a total of $70,000 in retirement income.
Will it be enough? Well, much will depend on where you live. According to one study by the folks at GoBankingRates.com:
- A retirement nest egg of $1 million would be completely drained in less than 20 years in three states: Massachusetts (19 years), California (16 years), and Hawaii (12 years).
- By comparison, the same amount could last longer than 70 years in five states: Oklahoma (71 years), Louisiana (76 years), Arkansas (76 years), Mississippi (87 years), and West Virginia (88 years). You would need less than $1,200 a month after Social Security for expenses in these states.
- To retire for at least 30 years, $1 million (along with Social Security) would be enough in 36 states.
Depending on how much you plan to have when you retire, you might want to consider relocating for retirement. Before doing so, do some online searches for cost-of-living calculators that can help you compare where you live now with where you might move to.
While the study's findings are very interesting, remember that $1 million is not necessarily the magic number for everyone. Some might need more and some less, depending on your expenses and lifestyle. Also, your nest egg might go further than the study's findings suggest, if your circumstances are far from average. (For example, you might live in your kid's house, negating the need for housing money.)
As you go through your financial life, be sure you're not just saving and investing for retirement -- but that you're also thinking of how you'll live in retirement. And if you're way behind in your saving and investing, know that you have some options there, too.
