How much money should I withdraw from my retirement account to live comfortably?
I am 64 years old and I work part time. I am collecting $1,000 a month in Social Security and I have $150,000 saved for retirement. I'd like to start withdrawing from my retirement fund next year. How much can and should I take out per month so I can live comfortably for the next 15 years?
This is a tricky question to answer - how is your $150,000 invested? If you have it in cash and want it to last for 15 years, the answer is simple- $833 per month. This is simply assuming very little interest on your 150,000 and divide it by the number of months you are solving for - which is 180.
If the money is invested conservatively, which is recommended if this is all you have, at say 4%, then the amount you can withdraw to last 15 years increases, but not by much. At a 4% average rate of return, the math works out to roughly $1100 a month over a 15 year period. This however does not address any variation or volatility in the investment mix. And also means there is zero in your account at month 181. If market suffers or you dont earn 4%, money could run out sooner.
A better way to analyze the definition of living comfortably is to determine how much per month you actually need to be "comfortable". This will then inform you as to how you should invest the $150,000, if at all, or if you should keep in cash.
You also need to evaluate what happens after 15 years, is there another pot of money to draw from? At 64, you are young in determining sustainable retirement income, albeit supplemental over parttime work, as at some point that parttime income will end. In 15 years, you will still actually be young - only 79 - and could easily live another 15 years. Evaluation of expenses, longevity & risk tolerance all need to be addressed before making a reasonable recommendation on how much you can take out per month to live comfortably.
If you need help with these recommendations, seek out a financial planner in your area to help you. Likely someone who does personal financial planning - not just investments - and can do it for you on an hourly or fee basis.
The first step in getting the answer to your question is to calculate your ongoing expenses. That includes the full range of expenses including housing, food, utilities, insurance, clothing, and at least a dozen or more categories that we all have to deal with. Once you have this budget prepared, your objective will be to generate sufficient income to make ends meet. That will include the $1,000 a month in Social Security.
If your retirement fund earns 6% a year and you start drawing down $1,500 a month next year, the fund will last about 15 years. Altogether, you would have $2,500 a month to live on. After you figure out your expenses, you'll have a better idea of whether that will be enough to get the job done.
Wallstreet has what they call the 4% rule. Based on your numbers, that's $6000/year. Hardly what I would consider "comfortable" It all comes down to your spending lifestyle in retirement as well as your lifespan I guess. See if you can get that retirement account up to $250,000.
Your question was reasonable until the last five words. Fifteen years? What happens if (as is likely) you live to be 85? Or 95? Do you really want to take a chance of being old and broke? Of course not.
I use as a rule that your savings should be 20 times your annual draw. That is, your lifestyle should not cost you more than your SS plus your part-time salary plus about $7,500 per year. This doesn't absolutely guarantee that you won't outlive your savings but it comes close, especially if the $150,000 is sensibly invested and averages about 5% per year. When doing your annual budget don't forget to factor in a cushion for emergencies -- medical, or a new roof, or a new car, for example. Stuff happens.
A basic starting point would be to withdraw 4% of your accumulated nest egg starting at your full retirement age (66+). That's $6000 annually and is consistent with the back tested "4% rule" cited by other responders. You should be aware that chronically low bond yields and longer life spans might impair this 4% rule. Vanguard and Schwab recently have published research suggesting that a safe sustainable level of distribution may be closer to 3% to 3.5% of savings. As a practical matter, I would encourage you to work as long as you can so that you can both increase your savings and defer distributions. $1000 social security plus $500 monthly distributions will not offer much room for error.
Adaptive distribution rules offer the potential for greater overall consumption with less money left over at death. What do we mean by "adaptive distributions"? The retiree reevaluates his portfolio every year and wthdraws differing amounts depending on actual portfolio performance.
A simple example might be a strategy where the retiree divides his or her life expectancy into the current value of the nest egg and distributes the result (couples could use joint life expectancy). The individual takes a larger and larger fraction of the nest egg as time goes on. The amount taken is a function of actual performance. The risk is that distribution levels can go down if the market falls. You might want to establish minimums and maximum contraints on the distribution amounts. For more information on distribution strategies, you can check out my more detailed article on the topic.