By Paul A. Merriman, MarketWatch
Here’s a question: In these times of stock-market shock — when the market can be up or down in one day as much as it might be up or down in a year — who has the patience to think rationally about long-term retirement planning?
Here’s the answer: If you haven’t retired yet, you should find a way to do exactly that sort of thinking. Perhaps more than ever, this is a good time to get the help of a good financial adviser for this task.
While we hold our breath for the latest good or (more likely) not-so-good news, let’s wade into this topic a bit.
Most people look forward eagerly to retirement, but it’s a change that requires many important choices, some of which can have pretty big consequences.
Today I want to focus on one of those forks in the road: How much money you expect your life savings to provide every year for your living expenses.
The big trade-off:
On the one hand, if you take out more money, you run a greater risk of running out of money. On the other hand, if you take out less money, you forego the retirement lifestyle you have looked forward to.
How you navigate this puzzling landscape is a bit of a challenge. But I’ll give you a “map” to make it easier.
Let’s start with a set of numbers I have developed over the years to show what would have happened to somebody who retired at the start of 1970.
There’s nothing magic about that year except that we have reliable data for the subsequent years, a period that included lots of favorable and unfavorable economic trends, world crises, some years of substantial inflation, and serious unexpected ups and downs in the stock market.
The years since 1970 give us a window into the wide range of market returns that might happen in the future. To follow the numbers, imagine (even though you’re probably much too young) that you retired in 1970 with a portfolio worth $1 million.
I’ll assume you chose a first-year withdrawal of $30,000 or $40,000 or $50,000 or $60,000, and that you wanted subsequent annual withdrawals to go up reflecting actual inflation.
To limit the variables, I’ll further assume that your $1 million was invested equally (50/50, in other words) in the S&P 500 Index /zigman2/quotes/210599714/realtime SPX +1.23% and a combination of short-term and intermediate-term U.S. government bonds.
That’s a pretty reasonable stock/bond allocation for retirees, and it reflects the overall risk level of my own investments.
So your choice in this exercise is whether you start by taking out $30,000, $40,000, $50,000, or $60,000.
Here’s where that fundamental trade-off translates into numbers: If you chose $30,000, you would have a lot less to spend but also much less risk of running out of money. If you chose $60,000, you would have much more to spend, but a considerably higher risk of running out of money.
Here’s a table to give you a snapshot of how you would have fared in the first 10 years of your retirement, depending on your rate of withdrawal.
Table 1: The first 10 years
|First 5 years withdrawals||$164,961||$219,947||$274,933||$329,920|
|First 10 years withdrawals||$400,027||$533,369||$666,710||$800,052|
|Balance 12/31/1979||$1.33 million||$1.15 million||$959,623||$771,937|