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The RetireMentors

Retirement advice from experts in the business

March 2, 2016, 7:14 a.m. EST

Do you think you have enough money to retire?

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By Paul A. Merriman

About Paul

Paul Merriman is committed to educating people of all ages to get the most from their retirement investments. Founder of Merriman Wealth Management, a Seattle-based investment advisory firm, he is the author of numerous books on investing: "Financial Fitness Forever," "Live It Up Without Outliving Your Money," and the new "How To Invest" series, free at his website:  "How To Invest" series: "First Time Investor," "Get Smart or Get Screwed: How to Select the Best and Get the Most from Your Financial Advisor" and "101 Investment Decisions Guaranteed to Change Your Financial Future." In his retirement, Paul writes a weekly column at MarketWatch and continues his weekly podcast, Sound Investing, which was recognized by Money magazine as "the best Money Podcast in 2008". He is president of The Merriman Financial Education Foundation and all profits from the sale of his books are used to advance financial literacy. His recommendations for portfolios of Vanguard funds, Fidelity funds and ETFs, podcasts, articles and books are available at paulmerriman.com. Follow Paul on Twitter @SavvyInvestorPM.

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The takeaway

So here's one obvious conclusion: A retirement portfolio based on these assumptions needed at least 30% in equities in order to keep supporting the retiree through 2015. In 2015, the "fixed" distribution was $250,090, only about one-fifth the value of the portfolio at the end of that year.

Barring a highly unlikely string of spectacularly successful market years, this withdrawal rate could not last very much longer.

In order to support a reasonable expectation of continuing much longer, the portfolio would need to be invested at least 40% in equity fund. A 50% equity stake would provide a much greater probability of having a good future.

And yet 50% in equities exceeds the comfort level of many retirees.

It's obvious, of course, that 46 years exceeds the life expectancy of most retirees. But if you want a portfolio to continue to support a surviving spouse or to end up with enough to make significant end-of-life gifts, some extra margin is necessary.

So it's reasonable to conclude that this plan — 4% withdrawals increased every year for inflation — is less than ideal for many retirees.

Another road

Fortunately, there's a good alternative, especially for retirees with ample savings. You'll find the evidence for it in Table 1 .

The numbers here are based on the same assumptions as the previous table, with one crucial difference: This time we assume the 1970 retiree had saved enough to get by with an initial withdrawal of 3% instead of 4%.

In this case, you can see that none of the portfolios, even the one invested exclusively in bonds, ran out of money by the end of 2015. However, even at this very conservative withdrawal rate, the all-bond portfolio would not have lasted much longer.

Fortunately, moving up to 20% in equity would in all likelihood have provided enough of a cushion to keep the withdrawals going for another decade, maybe longer.

The even bigger takeaway

I think there's a clear lesson to be learned from these two tables: If you save enough money before retirement so you can meet your needs with withdrawals of 3% instead of 4%, you can invest more conservatively, and without much risk of running out of money.

Some retirees want or need to take out more than 3% or 4%. In Table 3 , you'll see the results of 5% fixed withdrawals. This requires a portfolio weighted heavily toward equities, involving more risk than many retirees should take on.

And Table 4 follows portfolios at a withdrawal rate of 6%. In this scenario, only the 100% diversified equity portfolio would have made it through the end of 2015. And in order to make 2016's distribution, our retiree would have had to sell nearly 20% of the portfolio.

The original question

Do you have enough to retire?

An important part of the answer depends on how aggressively or conservatively you invest.

  • If you invest too conservatively, your returns may be unable to keep up with inflation.

  • But if you invest too aggressively to try and make up for inadequate savings, you may have an awful time getting through normal market declines.

This is a difficult tradeoff, and my advice is simple: If you can, save more than "just enough" before you retire.

Fortunately for people who do that, there's another very good option: Variable (instead of "fixed") withdrawal strategies. I'll take up this topic in my next column.

In the meantime you might like to listen to my podcast titled “ How much can you take out of your investments in retirement?

Richard Buck contributed to this article.

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