I Wanna Retire!!

2dsdad
Wed, 17 Jan 2007 21:12:25 +0000

Sorry, I thought that link was free. Perhaps some excerpts will give you the idea without getting me in trouble.

"Spending down a portfolio in retirement is a treacherous business, because you don’t know how long you will live, what the inflation rate will be or how financial markets will fare.

Faced with all this uncertainty, experts typically suggest two solutions. First, you might limit your initial portfolio withdrawal rate to just 3% or 4%, equal to $3,000 or $4,000 for every $100,000 saved. This is well below the 5% and 6% withdrawal rates that used to be advocated and reflects, in part, a concern about today’s lofty stock valuations and low after-inflation bond yields.

“Two percent is bullet-proof, 3% is probably safe, 4% is pushing it and, at 5%, you’re eating Alpo in your old age,” reckons William Bernstein, an investment adviser in North Bend, Ore. “If you take out 5% and you live into your 90s, there’s a 50% chance you will run out of money.”"

“Trouble is, the typical household headed by a 55- to 64-year-old has less than $90,000 in savings, so a 3% or 4% withdrawal rate would mean scant income. To make matters worse, if markets are kind, these folks may look back later in retirement and find they had pinched pennies unnecessarily.”

"My suggestion: Think about your retirement in two acts, the period until age 85 and the period after.

Suppose you retire at age 65. Plan on spending down 85% of your portfolio over the next 20 years. You might withdraw 1/20th in your first year of retirement, 1/19th in the second year and so on.

With this strategy, your initial annual withdrawal would be equal to 4.25% of your total savings. But if your investments perform well, your subsequent withdrawals would soar and you would end up with far more income than with a traditional approach, where you start at 3% or 4% and increase for inflation.

In case you live beyond age 85, you need a financial backstop. To that end, invest the other 15% of your savings in a mix of stocks and 20-year inflation-indexed Treasury bonds. If you are still alive at age 85, you can spend down this money gradually or use it to buy an income annuity. To supplement this income, plan on tapping your home’s equity at age 85 by taking out a conventional or reverse mortgage."