The Motley Fool Discussion Boards

Previous Page

Investing/Strategies / Retirement Investing


Subject:  Re: Buy an annuity vs. fixed amount withdrawal Date:  3/12/2000  12:31 PM
Author:  leehjones Number:  20031 of 105976

(Another long post, please bear with me)

TMFPixy arranged the electrons thusly:

<<The income taken each year was based on the initial draw as increased by inflation or decreased by deflation for the prior year. If
you have $100K and begin taking 5%, then in the first year you take $5K and leave $95K at investment. At the end of the year
you note inflation for that year was 3%. Therefore, you compute the second year's income as $5,150, which is the product of 1.03
times $5K. At the end of year two you note inflation is again 3%, so the next year's draw becomes $5,305, which is the product of
$5,150 times 1.03. If there was deflation (none occurred between 1961 and 1998), then the draw would be decreased. The study
did not adjust for the remaining size of the portfolio, something that would happen in real life.>>

Thank you for the clarification - I hadn't realized that you just computed the 5% number once and then *only* adjusted for inflation. So now it's easy to see how, in a healthy bull market, your pot o' dough is likely to grow almost out of control.

Allow me to mention another strategy (which was alluded to in another one of Pixy's articles). You plan to live another 30 years, and decide that 5% is a safe withdrawal level. You start with your $100K and take out 5%, which is $5K. A year later, your $95K ($100K-$5K) has grown 20% (this is the Foolish Four after all) to $114K. You say, "I think I'll start a 29-year progam," and take out 5% of $114K, which is $5700. Your $108,300 ($114000-$5700) grows 10% the next year to $119,130. You say, "I think I'll start a 28-year withdrawal program," and take out 5% of $119,130 which is $5956.50. And so on.

So in this strategy, to the degree that your investments outperform inflation, you get to take more money each year. And you won't have *quite* the same runaway growth problem that a well-performing portfolio would give you if you only used the first year's number and then adjusted for inflation.

Will this work? Yes. Unlike the original strategy, which adjusts for inflation/deflation without watching your investment, by tying your withdrawal to the actual value of your pot of money, then you guarantee that you'll never overspend it. And, unless you change the strategy at some point, you'll leave your heirs with 95% of the balance at the beginning of the last year of your life.

The downside, of course, is that if your investments go *down* in a given year (which they are almost certain to do), then you have to take out less money the next year.

<<They need to follow the course that makes them most comfortable. In the present marketplace, a FF strategy would
probably make many retirees very edgy. There's more to life than having to worry about your stash, and if such a proposal would
make your parents uncomfortable, it should not be followed under any circumstances.>>

Piffle. I hate it when somebody points something out to me that I "know", but have been conveniently ignoring. A previous respondent had said something like "Your father should be more risk-tolerant since his basic needs are covered by pensions and Social Security." That phrase should have woken me up. Risk tolerance is as personal a feeling as whether you prefer a window or an aisle - even more so. If my Dad had $100 million in the bank, he'd worry about the fate of that $100K TSP; that's the cloth from which he's cut. As difficult as it is for me to accept, he might well be perfectly happy losing the spending power (due to inflation exceeding the cap on the growth in his annuity) in exchange for the certainty of always getting that fixed chunk of money.

And I am indebted to Pixy for reminding me of that.

Regards, Lee
Copyright 1996-2022 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us