Has ***** scared him?
Here's an excerpt from his weekly article.
Q: My wife and I are both 65 and retired. We have $350,000 invested with a financial planner. It is diversified with 73 percent in mutual funds plus a mixture of annuities, insurance, REITs and cash. I have a $100,000 universal life policy and a long-term care policy. We have a house and lake home with a combined value of $350,000 and no mortgages. Our income with Social Security, a 10-year $50,000 annuity and my part-time work is about $36,000 per year. I am in excellent health. My wife has major health problems, but we have very good health insurance. We get by comfortably with this income, but ...
Should I be drawing out the recommended 4 percent to 5 percent per year for any luxuries like a new car, more travel, and maybe helping our kids with gifts? We want to leave some of our estate to our children and charity, but we also want to enjoy life while we still can. Our planner has told me what my options are but seems to send the signal that I should not spend any from our savings unless necessary. -- D.S., by e-mail
A: Even though you provided a lot of information, it isn't enough to make a sure call on what kind of withdrawals you could make. That said, the amount you could take for income may not increase very much from what you do at present. Let me explain.
There is broad agreement that you can take somewhere between 4 percent and 5 percent annually from a diversified portfolio and not endanger the principal. Using that benchmark, you could withdraw $14,000 to $17,500 a year. Many financial planners, however, fail to mention that the 4 percent to 5 percent figure should include the cost of managing the money because it is charged directly against your principal. So if the average cost of managing your assets is 1 percent a year (and I'll bet it is higher), your withdrawal range drops to 3 percent to 4 percent, or $10,500 to $14,000.
Meanwhile, you have a $50,000 10-year annuity that I assume delivers about $530 a month, or $6,360 a year. Since most of that is return of principal, it adds little to your taxable income, so it's probably the equivalent of about $7,000 from your other investments. As a consequence, you might increase your income by $3,500 to $7,000.
There is another disturbing factor. The established 4 percent to 5 percent safe withdrawal rate rules of thumb are based on long periods of time in which yields were higher than they are today and stock valuations were lower. A growing school of thought believes future withdrawal rates should be reduced to reflect expected lower future returns. This would knock another 1.5 percent to 2 percent off the safe withdrawal rate.
You don't hear much about this because it is information most people don't want to hear. Also, there are plenty of sales people out there, calling themselves financial planners, who are still telling their clients that it is safe to withdraw 6 percent or 7 percent a year.
Finally, there is the really big unknown. If you want your income to be constant, how much do you earn working part time? That income will have to be replaced from your savings when you actually stop working. Multiply your earnings by 25 and that's the "savings reserve" you need for your eventual full retirement.
Here's an excerpt from his weekly article.
Q: My wife and I are both 65 and retired. We have $350,000 invested with a financial planner. It is diversified with 73 percent in mutual funds plus a mixture of annuities, insurance, REITs and cash. I have a $100,000 universal life policy and a long-term care policy. We have a house and lake home with a combined value of $350,000 and no mortgages. Our income with Social Security, a 10-year $50,000 annuity and my part-time work is about $36,000 per year. I am in excellent health. My wife has major health problems, but we have very good health insurance. We get by comfortably with this income, but ...
Should I be drawing out the recommended 4 percent to 5 percent per year for any luxuries like a new car, more travel, and maybe helping our kids with gifts? We want to leave some of our estate to our children and charity, but we also want to enjoy life while we still can. Our planner has told me what my options are but seems to send the signal that I should not spend any from our savings unless necessary. -- D.S., by e-mail
A: Even though you provided a lot of information, it isn't enough to make a sure call on what kind of withdrawals you could make. That said, the amount you could take for income may not increase very much from what you do at present. Let me explain.
There is broad agreement that you can take somewhere between 4 percent and 5 percent annually from a diversified portfolio and not endanger the principal. Using that benchmark, you could withdraw $14,000 to $17,500 a year. Many financial planners, however, fail to mention that the 4 percent to 5 percent figure should include the cost of managing the money because it is charged directly against your principal. So if the average cost of managing your assets is 1 percent a year (and I'll bet it is higher), your withdrawal range drops to 3 percent to 4 percent, or $10,500 to $14,000.
Meanwhile, you have a $50,000 10-year annuity that I assume delivers about $530 a month, or $6,360 a year. Since most of that is return of principal, it adds little to your taxable income, so it's probably the equivalent of about $7,000 from your other investments. As a consequence, you might increase your income by $3,500 to $7,000.
There is another disturbing factor. The established 4 percent to 5 percent safe withdrawal rate rules of thumb are based on long periods of time in which yields were higher than they are today and stock valuations were lower. A growing school of thought believes future withdrawal rates should be reduced to reflect expected lower future returns. This would knock another 1.5 percent to 2 percent off the safe withdrawal rate.
You don't hear much about this because it is information most people don't want to hear. Also, there are plenty of sales people out there, calling themselves financial planners, who are still telling their clients that it is safe to withdraw 6 percent or 7 percent a year.
Finally, there is the really big unknown. If you want your income to be constant, how much do you earn working part time? That income will have to be replaced from your savings when you actually stop working. Multiply your earnings by 25 and that's the "savings reserve" you need for your eventual full retirement.
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