Following is an article that appeared in the WSJ today. Normally I try to avoid all discussions of safe withdrawal rates because they tend to get a little combative. Also, frankly, a little boring. Thought I would see what reaction the article gets from the tough crowd on this board!
LawGirl
GETTING GOING
By JONATHAN CLEMENTS
Retirees Don't Have to Be So Frugal:
A Case for Withdrawing
Up to 6% a Year
November 17, 2004; Page D1
Maybe you don't have to order the early-bird special after all.
Many retirees have trimmed their spending during recent years, and it isn't just because of plunging bond yields and tumbling stock prices. Instead, they have been reacting to dire warnings from Wall Street, cautioning them that their portfolios can't sustain the sort of withdrawal rates that used to be considered safe.
Feeling pinched? Don't resign yourself to a lifetime of scrimping and saving just yet.
Boosting income. When advising seniors about their spending, financial experts have grown increasingly conservative. For instance, one influential study found that, if retirees want to be confident their savings will last 30 years, they need to limit their initial withdrawal rate to 4.1%, or $4,100 for every $100,000 saved.
But a new study by Minneapolis certified financial planner Jonathan Guyton, which appeared in October's Journal of Financial Planning, suggests retirees don't have to be nearly so frugal. He analyzed how to generate 40 years of income while surviving brutal market conditions, such as high inflation and a steep market decline early in retirement.
His finding: Retirees may be able to withdraw as much as 6.2% initially, provided they follow three rules. "There's nothing radical to this," Mr. Guyton says. "It's just a matter of being street smart. These are things you would sensibly think about doing after a tough year."
Before we get to the rules, you will need a little background. When experts talk about withdrawal rates, they are typically referring to the percentage of a portfolio's value withdrawn during the first year of retirement.
Thereafter, retirees are assumed to increase their withdrawals along with inflation. Let's say you retired with $600,000, inflation ran at 3% and you used a 6% withdrawal rate. In that scenario, you would withdraw $36,000 in the first year of retirement, $37,080 in year two, $38,192 in year three and so on.
Keep two things in mind. First, you will owe taxes, so not all this money can be spent. Second, if you spend your dividends and interest, these sums count toward the amount withdrawn.
MAKING IT LAST
Here's how to reduce the risk of outliving your retirement savings:
• Clamp down on spending if your portfolio suffers a calendar-year loss or rapid inflation returns.
• Avoid selling hard-hit stock mutual funds.
• Invest part of your bond money in an immediate annuity that pays lifetime income.
• Favor low-cost funds, so you keep more of what you make.
LawGirl
GETTING GOING
By JONATHAN CLEMENTS
Retirees Don't Have to Be So Frugal:
A Case for Withdrawing
Up to 6% a Year
November 17, 2004; Page D1
Maybe you don't have to order the early-bird special after all.
Many retirees have trimmed their spending during recent years, and it isn't just because of plunging bond yields and tumbling stock prices. Instead, they have been reacting to dire warnings from Wall Street, cautioning them that their portfolios can't sustain the sort of withdrawal rates that used to be considered safe.
Feeling pinched? Don't resign yourself to a lifetime of scrimping and saving just yet.
Boosting income. When advising seniors about their spending, financial experts have grown increasingly conservative. For instance, one influential study found that, if retirees want to be confident their savings will last 30 years, they need to limit their initial withdrawal rate to 4.1%, or $4,100 for every $100,000 saved.
But a new study by Minneapolis certified financial planner Jonathan Guyton, which appeared in October's Journal of Financial Planning, suggests retirees don't have to be nearly so frugal. He analyzed how to generate 40 years of income while surviving brutal market conditions, such as high inflation and a steep market decline early in retirement.
His finding: Retirees may be able to withdraw as much as 6.2% initially, provided they follow three rules. "There's nothing radical to this," Mr. Guyton says. "It's just a matter of being street smart. These are things you would sensibly think about doing after a tough year."
Before we get to the rules, you will need a little background. When experts talk about withdrawal rates, they are typically referring to the percentage of a portfolio's value withdrawn during the first year of retirement.
Thereafter, retirees are assumed to increase their withdrawals along with inflation. Let's say you retired with $600,000, inflation ran at 3% and you used a 6% withdrawal rate. In that scenario, you would withdraw $36,000 in the first year of retirement, $37,080 in year two, $38,192 in year three and so on.
Keep two things in mind. First, you will owe taxes, so not all this money can be spent. Second, if you spend your dividends and interest, these sums count toward the amount withdrawn.
MAKING IT LAST
Here's how to reduce the risk of outliving your retirement savings:
• Clamp down on spending if your portfolio suffers a calendar-year loss or rapid inflation returns.
• Avoid selling hard-hit stock mutual funds.
• Invest part of your bond money in an immediate annuity that pays lifetime income.
• Favor low-cost funds, so you keep more of what you make.
