Thursday, March 28, 2013

Rethinking Your Retirement Rate
(SMART 401K Blog, March 28, 2013)

"Much like retirement investing, a suitable withdrawal strategy likely will be unique to an individual’s situation. After all, not everyone is going to have the same wants and needs in retirement. A number of other variables also can impact a withdrawal strategy’s success, such as number of years in retirement, other income sources, portfolio value and even asset allocation."
The SMART 401K site includes a good spending calculator that shows how long a given level of accumulated savings will last based on assumptions and desired spending levels you specify.  It does not tell you how much you can spend each year, but you can work backwards to get basically the same results obtained using the spreadsheets in my website (small differences result from different assumed timing of withdrawals).
As noted in the original article on my site, the actual spreadsheet used in the process is not as important as the discipline required to review results at least once a year and make reasonable adjustments for changes in experience and assumptions.

Monday, March 25, 2013

How to Draw Down Your Nest Egg: 3 Alternatives to the 4% Rule
(Time, March 22, 2013)
This article refers to the three alternatives to the 4% Rule discussed in the WSJ article of March 1, 2013 (see below).  While these three alternatives are potentially better than blindly following the 4% Rule, it is important to realize that any approach that does not reflect your personal financial situation and changes in it from year to year is less likely to be successful.  You need to crunch your numbers at least once a year in order to keep your spending budget on target.

Wednesday, March 20, 2013

Make Your Retirement Savings Last Into Your 90s
by Walter Updegrave (CNN Money, March 15, 2013) 

Another article encouraging retirees to use a good retirement calculator and revisit it each year to determine annual withdrawals.

Mr. Updegrave develops a 4% withdrawal strategy (with annual inflation increases) for a retiree with $500,000 in accumulated savings who is age 65 and wants his money to last for 30 years.  He assumes inflation of 2.5% per annum and some (undisclosed) assumptions for future returns on equities and bonds.

When determining annual withdrawals, it is important to consider other sources of retirement income that may not be indexed with inflation as well as the impact future inflation may have on total spending amounts, particularly if you want your total annual spendable income to keep pace with inflation.

Using the V2.0 spreadsheet on this site and inputting 4% investment return, 2.5% inflation, $500,000 of accumulated savings and zero for annuity income and amounts to heirs, we get an initial withdrawal rate of 4.08%, which is reasonably consistent with Mr. Updegrave's calculation.   However, if we also input that this retiree has an annual fixed dollar pension of $10,000 per year (immediate annuity), we get an annual withdrawal of 3.55% from accumulated savings.  Similarly, if we input a $10,000 deferred annuity and 10-year period of deferral, we get an annual withdrawal percentage of 4.92%.

If we assume a 6% annual investment return and 4.5% annual inflation and no annuity amounts, we get a withdrawal rate of  4.07% (just about the same as in the lower inflation environment assumed by Mr. Updegrave), but inputting a $10,000 immediate annuity drops the withdrawal rate to 3.25% under this scenario and inputting a $10,000 deferred annuity results in a 4.67% withdrawal rate.

Bottom line:  Make sure the retirement calculator you use reflects your financial situation (including other annuity income and bequest plans) and you understand the implications of the assumptions you input (or that are built into the calculator).

Monday, March 4, 2013

Say Goodbye to the 4% Rule
(Wall Street Journal, March 1, 2013)

What to do when the old math doesn't add up?  This Wall Street Journal article offers three alternatives to the 4% Rule. Two of the three have already been discussed on this website and the third is just a variation of the safe withdrawal rate approach.  I continue to believe that the best answer to this question is to recalculate your withdrawal budget every year using data and assumptions that reflect your personal financial situation as advocated in this website.