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How do retirees draw down their savings?

In a world with fewer traditional pension plans and a stronger reliance on IRA and 401(k) plans, here's a key question many people are pondering: How much should you withdraw each year from your savings when you're retired? While analysts have written plenty about how people should deploy their savings in retirement, what are retirees actually doing?

A recent survey from mutual fund company T. Rowe Price provides some answers. The firm surveyed people who've retired in the past five years and have accumulated some savings for retirement in either an IRA or 401(k) account.

The survey reports that just 48 percent of retirees have a formal strategy for drawing down their retirement savings. Of those individuals, the median amount withdrawn in the past 12 months was 4 percent -- a number that's in line with amounts that retirement analysts and financial planners commonly recommend to make your savings last for the rest of your life.

But these averages mask some extremes: Nearly a quarter of survey respondents withdrew 8 percent or more -- a rate that's unsustainable if your retirement will last 20 years or more. And more than a quarter withdrew just 1 percent. Clearly, this group could withdraw more and still make their savings last for the rest of their lives.

Another key point: More than half of survey respondents -- 52 percent -- say they don't have a formal plan for withdrawing from savings. So what are they doing? There are a few possibilities, some good and some not-so-good:

  • Some retirees are most likely withdrawing little or nothing from their retirement savings, holding their savings in reserve for a future time when they might really need the money. These people are probably covering their day-to-day living expenses with other sources of retirement income, such as Social Security, a pension or part-time work. Nothing wrong with this strategy.
  • Some retirees are probably paying for their day-to-day expenses with other sources of income, and using their savings only for unforeseen emergencies. Again, there's most likely nothing wrong with using this strategy, if you make sure your other sources of retirement income will last for the rest of your life. You don't want to be in a situation where you exhaust your savings by paying for too many emergencies, and then some of your other sources of retirement income dry up.
  • Some retirees are probably just "winging it" -- withdrawing whatever amounts from savings they need to meet day-to-day living expenses. I've seen a number of friends and relatives follow this strategy with unfortunate consequences. Usually, these people withdraw their savings at a high rate that's not sustainable for a lifetime and end up running out of money in their 70s or 80s.

It's apparent from the T. Rowe Price survey that some retirees are doing a good job of managing their retirement resources, but others aren't. Every retiree should take the time to focus on a critical retirement planning goal: making sure you have sources of income (Social Security, a pension if you have one, savings and work) that can cover your basic living expenses for the rest of your life, no matter how long you live, and no matter what happens in the economy. If you're married or have a partner, you need to make sure the income lasts for the rest of their lives as well.

You should factor in some inflation in your basic living expenses, although some evidence shows that some people spend less money as they age, so you may not need to inflation-proof all of your retirement income.

Recognize that if you're currently working part-time, it's likely that you'll eventually reach an age when you're no longer able to work, so you'll need to plan for that very strong possibility. It's quite likely that some retirees in the survey who are currently withdrawing no or very small amounts from their savings are waiting until they can no longer work to start withdrawals.

No matter what strategy you choose to implement, you'll be much better off with a well-thought-out plan to deploy your retirement savings rathan than not doing any planning at all.

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