By JLP | April 25, 2006
Robert Powell has a piece about retirement withdrawal strategies. Powell interviewed Bob Carlson of Retirement Watch and author of The New Rules of Retirement and Stuart Lucas of The Wealth Strategists Network and author of the brand new book Wealth.
I found it interesting that Stuart Lucas recommends retirees withdraw NO MORE than 3% of their account balances per year. If you retire with $1 million, that means you can withdraw $30,000 the first year if you follow Lucas’ recommendation. That doesn’t sound like much of a retirement to me.
Bob Carlson is a little more aggressive with his withdrawal strategy, but it is slightly on the confusing side as this quote from the article demonstrates:
First, he says, decide the target spending percentage of your portfolio. Studies say that target should be 4% to 5% of the beginning value the first year. Then, divide your annual distribution into two portions. The first portion is last year’s spending plus whatever inflation was for the last year. Multiply this by 70%. The other portion is your target distribution rate from the fund. Multiply this by 30%. Add the two numbers, and that is your distribution for the year.
Example: Suppose you have a $500,000 retirement fund, set a 5% spending rule, your spending was $25,000 last year, and inflation was 2%. Here’s how you do the calculations. Last year’s spending plus inflation is $25,500. Multiplied by 70%, that is $17,850. Five percent of your fund is $25,000. Take 30% of that to get $7,500. Add the two results, and you will take $25,350 from the fund this year.
Suppose the portfolio declines to $480,000 next year and inflation again is 2%. One bucket of your spending will be $25,350 increased by 2%, or $25,857. Take 70% of that to get $18,100. The other bucket is 5% of the fund, or $24,000. Take 30% of that, or $7,200. Add the two and your spending is $25,300. You will have a small spending reduction to recognize the reduced value of your portfolio. Under a fixed 5% plus inflation rule, you would have spent $25,500 the first year and $26,010 the second year.
Personally, I think 3% is a little too low. I suppose if your goal is to leave a nice inheritance for your relatives, then 3% is a good strategy. For most people, 4 – 5% is probably more feasible.
No matter which strategy you go with, the point of all this is to START SAVING FOR YOUR RETIREMENT NOW!