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Old 08-21-2007, 02:50 PM   #1
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Retirement Spending

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The idea is that by boosting your withdrawal by the inflation rate each year, you maintain your purchasing power throughout retirement. And it can also make budgeting a little easier since you know how much money will be coming in each year. As to your question of whether that 4 percent plus subsequent increases for inflation should include dividends and interest, the answer is yes. The idea is to draw a given amount of money from your portfolio, regardless of whether you get that amount from interest, dividends or sales of investments.
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Starting at a low rate also makes it less likely that the combination of withdrawals and a big market downturn early in retirement will put so large a dent in your portfolio that it can't recover, forcing you to dramatically scale back your draws later in retirement.
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On the other hand, if you get through the first five to 10 years of retirement without running into a stretch of lousy returns, sticking to the 4 percent rule could not only prevent you from running out of money; it could also result in you having a huge portfolio late in retirement despite your withdrawals. That might not be such a bad thing if you're able to live the life you want on a 4 percent initial withdrawal rate. After all, having a cushion of assets could come in handy in the event you need some extra dough to handle health-care costs in your later years. Or you may just want to leave some money to heirs. But retiring on the 4 percent plan and ending up with a big fat portfolio balance late in life wouldn't be such a wonderful thing if it meant you had to live like a pauper during most of your retirement. What would be the fun in that? Of course, you can avoid that possibility by starting out with a higher withdrawal rate, say, 5 percent or 6 percent, which will give you more spending cash.
When I started reading this I thought that it was rather simplistic, but as I read on I realized what a nice job the author did in giving a rather complete explantion in a pretty short response to the Q.
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Old 08-21-2007, 06:56 PM   #2
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Originally Posted by mickeyd View Post
Yahoo! Personal Finance

When I started reading this I thought that it was rather simplistic, but as I read on I realized what a nice job the author did in giving a rather complete explantion in a pretty short response to the Q.
Nice article! Thanks. He didn't necessarily say anything new, but put forth a lot of common sense ideas very clearly in an article that was fun to read.
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