My parents are now well into their retirement (Mom’s 76, Dad’s 81). They are likely to move into an independent-living retirement community within the next 6-9 months, and within a couple of years they are likely to transition to assisted living. We kids are trying to help them figure out what they can afford based on their current assets and income streams.
The conventional wisdom is (or at least was, until recently) that when you retire, you should plan to draw down your nest egg at a rate of 4% per year; supposedly this would give a very low probability of you outliving your savings. That’s assuming you retire some time in your 60s. Given that my parents are now much older than that, it seems safe to advocate a higher drawdown rate.
What’s a safe upper bound for annual drawdown for them?
Average life expectancy for a 76 year old woman is approximately 92 years old, so 16 more years. For an 81 year old male, average life expectancy is about 90, so 9 more years. Plan for the longer 16 years.
Planning for the possibility of longer than average life span means they should use a lower drawn down rate than for an average life span.
Vanguard has a drawdown calculatorwith 5 year increments. It says for 15 years to plan 6.2% annual withdrawals. To cover 16 years, call it 5.9% Their calculator is based upon an 85% chance of not running out of money in the stated time frame.
Careful. Today’s interest rates are near 0 and might remain so for a long time. And if interest rates go up, so will inflation. And, in any case, you have to plan for increased medical expenses towards the end of life. I just turned 79 and my wife is 77 so we are facing this. So far, we are using our savings only to pay taxes as they are withdrawn from our RRSP (similar to 401k) and living from our pensions.