Saturday, November 10, 2012

What Will $1 Million Get You in Retirement?

What Will $1 Million Get You in Retirement? 
By Douglas Carey (AOL Daily Finance, 11/9/12)

Author argues that under his assumptions and the Monte Carlo method, a couple planning for 30 years of retirement invested 70% in equities and 30% in medium duration Treasuries has an 80% probability of not outliving their $1 million retirement savings if they withdraw $55,000 in the first year of their retirement (and increase that amount by inflation each year).   While his assumption for annual investment return on equities is shown as a "more reasonable" 6%, this is a real (after inflation) rate of return assumption on equities, and therefore his nominal investment return assumption on equities is approximately 9% per year, based on his assumed inflation assumption of 3% per annum.  If you input a 30-year life expectancy, 7.65% investment return (70% at 9% and 30% at 4.5%) and inflation of 3%, you will get a first year withdrawal rate of about 5.9% in the spendable calculator on this website.  So, a $55,000 initial withdrawal from $1 million of accumulated savings may be reasonable for a 30-year retirement period if you plan to be invested 70% in equities throughout your retirement and you believe you will achieve a 6% real rate of return on those assets.   Retirees who feel somewhat less bullish about equity investments may wish to run the spreadsheets and develop withdrawal strategies based on lower real rate of investment return assumptions.

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