- By Scott Thoma
Retirement means different things to each of us. As you consider your vision for retirement, there are three key numbers to keep in mind; you’ll want to discuss them with your financial adviser if you have one:
Your Withdrawal Rate
This could be your most important retirement number. Your withdrawal rate is the amount you will be taking out of your investment portfolio each year.
Nothing has a bigger impact on your retirement strategy than this number, since it can help determine how sustainable your retirement strategy will be. If you choose a number that's too high, you may run out of money; if the number is too low, it could mean you are being unnecessarily frugal and not living the life you want.
So what withdrawal rate makes sense for you? The answer is: it depends.
(MORE: The Surprising Amount Retirees Pull Out of Savings)
As you consider what makes sense for you, start with these questions: How many years will you spend in retirement? Can you be flexible with your withdrawals and not automatically increase your spending each year if you don't need to? Can you cut back in years of negative investment performance?
For example, we believe a 4 percent withdrawal rate may be a good starting point, but this assumes a 25-year retirement and the ability to be flexible with your spending if needed. In reality, your personal withdrawal rate will probably differ based on a number of different variables such as your age, how long you expect retirement to last, your asset allocation and your spending habits, among other things.
Additionally, this rate isn't something you set and forget — it should be reviewed each year.
The more years you plan on spending in retirement and the less expense-flexibility you have, the more conservative your withdrawal rate should be. This leads us to the second number:
Your Reliance Rate
Your reliance rate is simply the percent of your retirement income coming from your investments. While your withdrawal rate helps determine the sustainability of your retirement strategy, your reliance rate helps measure the sensitivity of your retirement strategy.
For example, say you’ll need $50,000 a year in retirement. If $40,000 will be coming from your portfolio and $10,000 will come from outside sources, your reliance rate is 80 percent.
(MORE: How to Keep Hazards From Ruining Retirement)
As your reliance rate increases, so does your sensitivity to market fluctuations. Regardless of their withdrawal rate, people who rely on their portfolios for 80 percent of their income are probably more sensitive to market declines than people who rely on their portfolios for only 20 percent.
A higher reliance rate means that market declines may have a greater effect on your strategy, unless you can be flexible in your spending and maintain a lower portfolio withdrawal rate.
If you are relying on your portfolio for the majority of your income, ask yourself some questions: How flexible are you with your spending? Can you spend less, if necessary, during inevitable short-term market declines? Also, can you consider other options to increase your income from outside sources? If you can, this could not only reduce your reliance rate, but also the withdrawal rate from your portfolio over the long-term.
And this leads to the third key retirement number:
Your Age for Claiming Social Security
A full discussion of your Social Security options is beyond the scope of this article, but it's important to understand that your Social Security benefit is an incredibly valuable retirement asset. The decision about when to take Social Security not only affects the amount of your benefit, but also your spouse's potential survivor benefit.
You can start taking it as early as 62 or wait as long as age 70. The more you delay receiving the money, the bigger your benefit will be.
Since your Social Security benefit is unaffected by market performance, it can be the foundation of your retirement income strategy. But it shouldn't be considered in isolation.
(MORE: Help for Deciding When to Claim Social Security)
So before you decide when to take Social Security, be sure you evaluate all your options and their effect on your retirement strategy.
Together, these numbers can be used to help ensure that you are better positioned to achieve your vision for retirement. It's also important to remember they will probably change over time, so be sure to revisit them so you can stay on track.
By addressing these numbers, you can turn your focus to a more important one — the number of things you want to accomplish in retirement.