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From the Wall Street Journal 03/01/2013
by: Kelly Greene
Conventional wisdom says you can take 4% from your savings the first year of retirement, and then that amount plus more to account for inflation each year, without running out of money for at least three decades.
This so-called 4% rule was devised in the 1990s by California financial planner William Bengen and later refined by other retirement-planning academics. 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%, and adjusted each year for inflation, for every 30-year span going back to 1926-55.
Well, it was beautiful while it lasted. In recent years, the 4% rule has been thrown into doubt, thanks to an unexpected hazard: the risk of a prolonged market rout the first two, or even three, years of your retirement. In other words, timing is everything. If your nest egg loses 25% of its value just as you start using it, the 4% may no longer hold, and the danger of running out of money increases.
If you had retired Jan. 1, 2000, with an initial 4% withdrawal rate and a portfolio of 55% stocks and 45% bonds rebalanced each month, with the first year's withdrawal amount increased by 3% a year for inflation, your portfolio would have fallen by a third through 2010, according to investment firm T. Rowe Price Group. And you would be left with only a 29% chance of making it through three decades, the firm estimates.
That sort of scenario has left many baby boomers who are in the midst of retiring riddled with angst. "The mind-blowing aspect of retiring is all these years you're accumulating and accumulating, and then you need to start drawing down, and you have no idea how to do that," says Al Starzyk, a 66-year-old retired printing executive in Williamsburg, Va.
So, if you can't safely withdraw at least 4% a year from a balanced portfolio of equity and bond funds, what do you do? ...
Our Answer: It may be counterintuitive to some but it has been proven time and time again that withdrawal rates can be much higher if there is no risk in your retirement accounts.
It's free, secure, and there is no obligation.
I was exploring some highly touted and "inexpensive" indexed funds on a top companies website. Over the last ten years it seems that they have some good returns. Unfortunately they ignore one simple math problem. They quote the average return over a time period NOT the actual return.
Most of their customers probably don’t know that any time a negative return or loss is posted, the average can be very mis-leading. Does anybody remember the losses of 2001 or 2008? Look at this simple example and see for yourself...
Assume you have $100,000 and you place it in an account that has a 50% loss in year one...how much do you have?
A: $100,000 X .50 = $50,000
Now assume that your account goes up 50% in year 2...how much do you have?
A: $50,000 X 1.5 = $75,000
Here’s where it gets misleading when the average is what companies use to induce their customers into buying or staying with them. The average return over the two year period is 0%. But when there is a negative or loss involved, the average will never be the actual return. In this case your actual return is -25% and an account value of $75,000. This is why companies don’t advertise actual returns.
Give us a call to get an illustration on “ACTUAL” returns and see how you can save for retirement without market losses.