How much can you withdraw from your nest egg each year without running out of money before you die?
Never has more been riding on the answer. The nation's 78 million baby boomers started turning 65 this year — and nearly 30 million of them have a "defined contribution" retirement plan such as a 401(k) account, according to the Employee Benefit Research Institute.
The market's wild swings in the past few years have made it impossible for new retirees to figure out with any certainty how much of their nest eggs they can tap each year.
"It's like bowling," says Sheryl Garrett, founder of the Garrett Planning Network, which has about 320 planners. "If you retire when the market goes up for a few years, you're going to be sitting pretty — like when you get a strike or spare and then keep doing well. But if you have a few bad years in a row, you're in trouble."
Before the 2008 market meltdown, some financial advisers encouraged people to pull as much as 7% from their retirement portfolio each year. The rationale: If withdrawals equal the average return on investments, then the size of the portfolio would stay about the same. With stocks returning about 10% annually since 1926, the idea didn't seem farfetched.
But as investors learned to their dismay in the past decade, any one year's returns can vary wildly from the average: The Dow Jones Industrial Average fell from 2000 to 2002, rose to a record high in 2007 and then plunged 34% in 2008.
If a new retiree pulled 7% from a $2 million nest egg each year starting in 2000, he or she would have been left with only $394,634 by the end of last year — and might need to stretch that two decades or longer.
A more conservative strategy, the "4% rule," hasn't panned out for some retirees, either. Devised in the 1990s by William Bengen, a financial planner in El Cajon, Calif., the rule — 4.15%, to be exact — quickly spread through the retirement industry.
Mr. Bengen analyzed historical returns of stocks and bonds and found that portfolios with 60% of their holdings in large-company stocks and 40% in intermediate-term U.S. bonds could sustain withdrawal rates starting at 4.15% (adjusted each year for inflation) for every 30-year span going back to 1926. Assuming $3 million in savings and average inflation of 3%, you could withdraw $124,500 the first year, $128,235 the second year, $132,082 the third year, and so forth.
But timing is everything. If you had retired Jan. 1, 2000, with an initial 4% withdrawal rate and a portfolio of 55% stocks and 45% bonds, your portfolio would have fallen by a third through 2010, and you would be left with only a 29% chance of making it through three decades, according to investment firm T. Rowe Price Group.
In the wake of the 2008 market meltdown, advisers have been scrambling to tweak their withdrawal recommendations. Trade publications are crammed with new research on drawdown strategies, and advisers and academics are revising, republishing and blogging so frequently that it is hard even for financial planners, let alone investors, to keep up.
Staying Vigilant
Whichever strategy you use, one thing is clear: "You can't just set it and forget it," says Christine Fahlund, a senior financial planner at T. Rowe Price. She encourages people to examine their portfolios and adjust their withdrawals at least once a year.
by Kelly Greene, WSJ via Yahoo | Continue reading:
Never has more been riding on the answer. The nation's 78 million baby boomers started turning 65 this year — and nearly 30 million of them have a "defined contribution" retirement plan such as a 401(k) account, according to the Employee Benefit Research Institute.
The market's wild swings in the past few years have made it impossible for new retirees to figure out with any certainty how much of their nest eggs they can tap each year.
"It's like bowling," says Sheryl Garrett, founder of the Garrett Planning Network, which has about 320 planners. "If you retire when the market goes up for a few years, you're going to be sitting pretty — like when you get a strike or spare and then keep doing well. But if you have a few bad years in a row, you're in trouble."
Before the 2008 market meltdown, some financial advisers encouraged people to pull as much as 7% from their retirement portfolio each year. The rationale: If withdrawals equal the average return on investments, then the size of the portfolio would stay about the same. With stocks returning about 10% annually since 1926, the idea didn't seem farfetched.
But as investors learned to their dismay in the past decade, any one year's returns can vary wildly from the average: The Dow Jones Industrial Average fell from 2000 to 2002, rose to a record high in 2007 and then plunged 34% in 2008.
If a new retiree pulled 7% from a $2 million nest egg each year starting in 2000, he or she would have been left with only $394,634 by the end of last year — and might need to stretch that two decades or longer.
A more conservative strategy, the "4% rule," hasn't panned out for some retirees, either. Devised in the 1990s by William Bengen, a financial planner in El Cajon, Calif., the rule — 4.15%, to be exact — quickly spread through the retirement industry.
Mr. Bengen analyzed historical returns of stocks and bonds and found that portfolios with 60% of their holdings in large-company stocks and 40% in intermediate-term U.S. bonds could sustain withdrawal rates starting at 4.15% (adjusted each year for inflation) for every 30-year span going back to 1926. Assuming $3 million in savings and average inflation of 3%, you could withdraw $124,500 the first year, $128,235 the second year, $132,082 the third year, and so forth.
But timing is everything. If you had retired Jan. 1, 2000, with an initial 4% withdrawal rate and a portfolio of 55% stocks and 45% bonds, your portfolio would have fallen by a third through 2010, and you would be left with only a 29% chance of making it through three decades, according to investment firm T. Rowe Price Group.
In the wake of the 2008 market meltdown, advisers have been scrambling to tweak their withdrawal recommendations. Trade publications are crammed with new research on drawdown strategies, and advisers and academics are revising, republishing and blogging so frequently that it is hard even for financial planners, let alone investors, to keep up.
Staying Vigilant
Whichever strategy you use, one thing is clear: "You can't just set it and forget it," says Christine Fahlund, a senior financial planner at T. Rowe Price. She encourages people to examine their portfolios and adjust their withdrawals at least once a year.
by Kelly Greene, WSJ via Yahoo | Continue reading:
