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No. of Recommendations: 10
You have asked a question that I believe is extremely under-discussed on these boards and elsewhere. How do you manage your nest egg after retirement to produce the income you need? You are likely interested in how much income you can safely derive and how do you insure that your nest egg lasts as long as you do.

I am 66 living with my retired schoolteacher wife. I have spent a lot of time reading everything I can find on managing ones nest egg after retirement. I am appalled to find that advice re post-retirement is outnumbered at least 10 to 1 by advice re pre-retirement. Nevertheless, my opinion re my situation and based on what is available can pretty much be summed up as follows.

As far as how long your nest egg should last, plan on living forever. IF you are in decent health it is much easier than projecting your death date.

The studies of "safe withdrawal rates" that I have been able to find indicate that withdrawal rates over about 3.4 percent per year are dangerous i.e., your nest egg may not last forever or even as long as you do.

The "safe withdrawal rate" is defined as the percentage you can withdraw in year one and then you adjust that absolute dollar amount up or down with inflation or deflation as time passes. With inflation you end up taking more and more from the nest egg each year. If your nest egg is growing over time, you have no problems assuming it grows as fast or faster than inflation. Just pray you don't retire just before a market crash and that past market behavior is a good indication of what may happen in the future. Based on past market history including the 1929 crash and the overall market behavior the 3.4 initial percentage seems safe.

For myself, I have found that my ability to pick "growth" stocks or funds that make me feel safe in the market today is poor at best. I have found myself much better able to pick stocks that have paid and hopefully will continue to pay reliable dividends. This is certainly not without risk, but for the present seems to be something that allows me to sleep at night. In effect, I plan to remove no more than the dividend yield of my nest egg annually. Currently I have a mix of stocks and bonds that yield about 6 percent annually, higher than the "safe yield" discussed above. This live off the dividends approach frees me from worrying about the day-to-day or month-to-month fluctuations in the prices of the stocks I own. Since I don't plan to sell in order to achieve my income goals I am not primarily interested in the stock price. I do have to tend to the nest egg to keep up with the companies I have invested in primarily to assure myself that the dividends are safe. I have owned some stocks that have cut dividends so I don't have a perfect system. I try to keep my investments diversified enough so I am not dependent on one company for more than about 5 percent of my income, so if one goes south I am not too severely hurt.

I am also aware of the need to grow my income over time to protect against inflation. I do this in several ways. I have some investments in companies that, while paying a dividend of only around 2 percent, do increase that dividend over time and also offer some hope of growth in the stock price. I also try to focus on companies that have a record of increasing dividends over time. Finally, I do not intend to spend all the dividend income every year. My projected need is less than the current 6 percent overall yield I have now and the "excess income" will be reinvested.

Basically this is a strategy to "live off the income" as opposed to "live off the growth." It will require watching very closely to make sure that the yields and the financial strengths of the underlying companies remain sound. If some holdings begin to weaken I will not hesitate to sell and move to something more advantageous. This may result in my having to take a capital loss but it is part of the risk I take.

If I am making a mistake here or if there are dangers that I am not recognizing, I really do want them pointed out to me. This is much too serious a matter to me to let a little ego get in the way. So give me your best shot. I am much more interested in reasons why this may be wrong than I am in endorsements.

Jim Sullivan aka 8128
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