Retiring at 60 with $4.5 million is an enviable position to be in and should guarantee a life of leisure.
But for a Reddit couple who wants to preserve the principal for their children and live off the income generated by their investments, ensuring that happens comes down to having a flexible withdrawal strategy.
According to the Financial Industry Regulatory Authority, this tends to include a diversified portfolio of dividend-paying stocks, interest-bearing bonds and other income-generating assets that work in conjunction to give the couple a steady paycheck without requiring them to sell the underlying assets.
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Instead of planning around a single withdrawal rate, advisors typically favor a range that can adjust as market conditions change, reports Investopedia. For a couple in their early 60s, a sustainable range tends to land between 3% and 4%.
The Safe And Steady Approach
Take a 3% withdrawal rate for starters. With $4.5 million, that would amount to $135,000 a year of $11,250 a month. If there were market downturns, this approach should ensure the couple won’t run out of money in a 30-year retirement. It may be conservative, but it will give them peace of mind if things went south.
The Middle Ground
A 3.5% withdrawal rate would increase the couple’s annual income to $157,500 a year or $13,125 a month. This rate would give them more income to support a higher-end lifestyle but also provide safety. If the couple could spend less during market downturns, the safety net would increase even more.
Risk Taker
A 4% withdrawal rate increases the annual income to $180,000 per year, or $15,000 per month. This rate, while doable, leaves less room for error. The couple has to commit to curb spending when the market goes down to make it work if they want to preserve their principal.
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Social Security The Added Benefit
Social Security is another factor in this scenario, which could further preserve the principal, particularly if the couple waits until their full retirement age of 67 or delays until 70 to collect benefits.
According to the Social Security Administration, the average monthly benefit for 65-year-olds is $1,611 or $19,332 a year. That increases to $2,148 per month, or $25,776 per year at age 70.
Combined the couple would collect $38,664 annually at 65 and $51,552 per year at age 70. That is a substantial contribution to their income, reducing the amount the couple has to withdraw from their portfolio.
Since they have $4.5 million, it is likely they earned more during their working years and thus will have an even bigger Social Security check than the average, adding to their income.
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Don’t Worry Too Much About Taxes
While taxes are something the couple has to consider, it may not be as big of a factor as they think, reported Investopedia. That’s because a lot of the income from a portfolio is taxed at a more favorable rate. Investopedia pointed to qualified dividends as one example.
Plus, if the …
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