Retirees Plan on Going Broke

Last Updated Nov 9, 2009 2:03 PM EST

Houston, we have a retirement math problem. Americans are bent on using up their retirement assets about a decade before they expect to die.

Retirement Income Withdrawal Rates Running on Empty
According to Wells Fargo's annual Retirement Fitness Survey, the 50+ crowd says it expects to spend about 21 years in retirement. That's a bit less than the 30-year target recommended by belt-and-suspender financial advisors, but it's indeed in line with average life expectancy for today's 65-year-olds. So let's just ride with that data point for now.

But here's where the math goes completely haywire: The same folks say they plan on withdrawing 10 percent of their retirement savings each year. That's Disconnect with a capital D. At a 10 percent annual withdrawal rate you'd likely run the gas tank dry in about 10 years. The AARP Withdrawal calculator says a 10 percent withdrawal rate would eat through your entire stash in 12 years (assuming a 6 percent annual return and a 3 percent annual inflation adjustment) -- and that doesn't even take into account taxes owed on retirement income.

Reality Check, Please
A 10 percent withdrawal rate is so absurdly optimistic the planning pros at T. Rowe Price don't even include it as an outlier possibility in their retirement planning missives. The highest they go is 7 percent, and it's not because they think that's exactly viable. T. Rowe estimates there's barely a 50-50 chance your money will last 20 years assuming a 7 percent withdrawal rate and a 60/40 mix of stocks and bonds. If you'd like to scale back the volatility and keep 40 percent in stocks and 60 percent in bonds, your "success rate" probability falls from 52 percent to 44 percent. And that's just if you plan on having a 20-year retirement. If you run the risk of living longer, a high withdrawal rate obviously will muck up your retirement security even more.

Bottom line: Unless you're sitting on a serious wad of home equity or expect to be bailed out by a hefty inheritance, a 10 percent withdrawal rate is a surefire way to go broke in retirement. For the record, the standard "best practice" is to aim to start with an initial withdrawal rate of no more than 4 percent of your assets. And when your portfolio gets pummeled -- see: 2008 -- the advice is to reduce your retirement income withdrawal rate for a few years to take some pressure off your beaten-down nest egg.

Gas tank photo courtesy of Flickr user A Siegel, CC 2.0