Armchair Millionaire Community Bulletin: Making Your Money Last Forever

Figuring out what you can withdraw from your portfolio every year without eventually going broke is one of the trickiest--and most important--investing questions out there.

New York, NY (PRWEB) July 6, 2004 -- Figuring out what you can withdraw from your portfolio every year without eventually going broke is one of the trickiest--and most important--investing questions out there. If you take too much out each year, you run the risk of depleting your savings. Likewise, if you take out too little, you can unnecessarily lower your standard of living. You're looking for the right balance: an amount you can take out every year and still be sure you have enough for your remaining years.

When we asked members of the Armchair Millionaire community about how they calculate their retirement needs, we heard some very thoughtful answers. Here are two:

"Our savings goal total was based on our current annual living expenses. We estimated our total savings goal as the amount necessary to cover living expenses if the annual return of the portfolio was 3 percent. That is, divide your annual need by 0.03 to determine the total amount." --Alan and Kay

"My goal is to have a nest egg that is large enough for me to withdraw an inflation-adjusted 3 percent, while keeping a very high 40 years survivability rate and giving me enough annual spending money. I've computed my survivability rate using a couple of different calculators that publicly available. While dependent on a few factors (retirement age, possible lifestyle changes, etc.), I've figured I need somewhere around $3 million." --Chris

Because outliving your money would be disastrous, this is one area where I highly recommend seeing a qualified financial planner with access to a computerized modeling program (most do). He or she can recommend an asset allocation and withdrawal rate that takes into account your unique circumstances.

In the meantime, however, you'll want to know some general guidelines. Academics who have studied this question tell us that safe annual withdrawal rates can vary from a low of 3 percent up to as high as 8 or 9 percent, depending on a number of different factors. Very generally speaking, however, I believe most investors should plan for a withdrawal rate in the 3 to 5 percent range.

There are many variables that you'll need to consider in order to come up with a withdrawal rate that will last as long as you do. My guide provides the most important ones.

The Armchair Millionaire's Guide to Determining Sustainable Withdrawal Rates

Consider the length of your retirement. The longer you need your portfolio to provide an income, the lower your withdrawal rate will need to be. If you're planning on retiring early, you'll have more years in retirement. This means that you'll need to plan on a lower withdrawal rate. On the other hand, if you love working and plan on working 'til you're 80, your portfolio will be able to sustain considerable higher withdrawal rates.

Factor in inflation. The erosive power of inflation poses a real challenge to retirement portfolios. If you want to be able to adjust your withdrawals for inflation (that is, increase the amount you take out every year), you'll need a lower withdrawal rate.

Determine the right asset allocation. Having a large percentage of bonds in a retirement portfolio lowers volatility (good for those who are very risk-adverse), but lowers the overall withdrawal rate you can expect to have. For most retirees, a good balance between both bonds and stocks (or stock funds) will be right.

Decide if you want your money to outlast you. Whether or not you want to leave behind an estate will make a huge difference in how much you can withdraw every year.

THE BOTTOM LINE: We all work hard to make sure we have enough to enjoy a happy and secure retirement. A crucial part of making that work pay off is careful planning--especially in the area of sustainable withdrawal rates.

THE ARMCHAIR MILLIONAIRE WEEKLY SURVEY: Why did you choose your financial advisor? Log on to www.armchairmillionaire.com and let us know.

Lewis Schiff is a contributor to CNNfnMoney.com, the Web sites for CNN and Money Magazine. His newest report, "How to Know When You Are Rich," is now available at www.armchairmillionaire.com.

CONTACT INFORMATION:
Lewis Schiff
Armchair Millionaire
877-833-2823
http://www.armchairmillionaire.com

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