Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (21) | Ignore Thread Prev | Next
Author: yttire Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5068  
Subject: Rate of withdrawal Date: 2/8/2005 9:14 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
This article suggests that you can withdraw up to 6% a year if you have a substantial percentage in stocks. For the risk inclined I suppose. (or desparate?)



This is from this source:

http://money.cnn.com/2005/02/04/pf/magpl_monday_updegrave_0503/index.htm






Make sure your money lasts

A new strategy to tap extra cash in retirement is appealing -- but may be risky.
February 7, 2005: 10:18 AM EST
By Walter Updegrave, MONEY Magazine




Monte Carlo Analysis Trading Software
Test your trading systems and methods with greater accuracy using Monte Carlo...
www.adaptrade.com

Financial Planning - J&L Software
Excellent financial and retirement planning software utilizing Monte Carlo...
www.jlplanner.com

DecisionPro - Monte Carlo Analysis
Download a free trial copy. Monte Carlo simulations run 60 times faster than...
www.vanguardsw.com

@RISK - Risk Analysis Software
Palisade @RISK adds Monte Carlo simulation to Excel for powerful risk analysis...
www.palisade.com


Too racy for retirement?
Safely boosting initial withdrawals to around 6% vs. 4% would require investing 80% of your portfolio in stocks, with significant amounts devoted to volatile small-cap and international issues. By contrast, a more typical retirement allocation might have 50% or less in stocks.


Cash 10%
Bonds 10%
REITs 10%
International stocks 20%
Small-cap growth 10%
Small-cap value 10%
Large-cap growth 15%
Large-cap value 15%



Source: Jonathan Guyton, Cornerstone Wealth Advisors.


NEW YORK (MONEY Magazine) - When it comes to tapping your retirement savings, conventional wisdom holds that you should limit yourself to modest withdrawals of just 4 percent of your portfolio's value a year, adjusted for inflation.

So if you have, say, $1 million socked away and inflation is running at around 3 percent, you'd take out $40,000 during your first year of retirement, $41,200 the following year, about $42,440 the next and so on.

That way you can keep up with increases in the cost of living yet still be reasonably sure your savings will support you over a retirement that could last 30 to 40 years.

Too stingy?
But do you really need to be so parsimonious? A recent, intriguing article in the Journal of Financial Planning by Minneapolis planner Jonathan Guyton suggests you do not.

By boosting the amount that older investors typically keep in stocks and applying strict rules about how money is withdrawn, Guyton's system could allow retirees to tap as much as 6.2 percent of their savings annually without running out of money for at least 40 years.

What's more, he tested this more generous withdrawal rate against one of the most volatile economic environments imaginable -- a stretch starting in 1973 that included a long period of exceedingly high inflation and two punishing bear markets but that also boasted nearly two decades of some of the best stock returns in history. (Guyton projected results for the remaining nine years to conclude that the draws would last 40 years.)

But are you comfortable with it?
Figuring out a way to boost income from savings during retirement is certainly a worthy exercise. But before you start loosening the purse strings, consider whether you'd really be comfortable with the strategy Guyton outlines.

Sustaining that higher 6.2 percent withdrawal rate, for instance, demands that you hold as much as 80 percent of your assets in stocks -- and a pretty volatile mix of stocks at that (see the chart, right). Even a more modest boost to a 5.4 percent withdrawal rate would still require devoting half your portfolio to stocks.

You'd also have to hold a very broadly diversified portfolio, with eight different asset classes. While I'm a big fan of diversification, most retirees, I suspect, aren't quite this meticulous about spreading their money around.

Adding another layer of complexity, Guyton's system involves strict adherence to a particular pecking order for withdrawals: First you sell off gains in profitable investments; then you pull money from bond holdings; as a last resort, you draw money from stocks that had a losing year.

"You want to avoid selling equities after a down year so you can give them a chance to recover," explains Guyton.

If your overall portfolio suffers a loss in any year, you'll also have to forgo your inflation increase the following year. And no matter how much the consumer price index might rise, you can never boost your draw by more than 6 percent in any year.

Nice theory, but in practice?
In theory, I agree with these rules. Limiting withdrawals during tough economic times, for example, makes perfect sense. I'm just not sure how diligently investors will follow them year in and year out.

I'm also wary of drawing conclusions from research based on any historical period, even one as challenging as 1973 through 2003. Before I considered using any system to tap more cash from my savings, I'd want to see what's known as a Monte Carlo analysis, basically a stress test of that withdrawal rate performed by running it through thousands of computerized simulations of different economic and investment conditions.

Guyton has told me he's considering doing just that. Until we see this more nuanced research, however, I suggest sticking with the traditional 4 percent withdrawal rate.

True, by limiting your draw you might end up spending less money in the early stages of retirement than you could have afforded in retrospect. But I'd much prefer to take that chance than run the risk that my savings might simply run out late in my life, just when I need the money most.


Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (21) | Ignore Thread Prev | Next

Announcements

Post of the Day:
Value Hounds

Medallion Financial: TAXI!
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement