Armchair Millionaire Community Bulletin: Making Your Money Last as Long as You Do

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Retirement planning can be a complex exercise, involving a range of issues many people fail to consider. Before leaping to conclusions about how much youÂ?ll need to retire, make sure to take these all into account.

Many people would assume that if your portfolio earned 10 percent every year that you could take 10 percent out each year and never run out of money. The problem is in any given year, market returns are nearly always substantially higher or substantially lower than that 10 percent. Just consider the last several years. A 10 percent annual withdrawal on top of the market's double-digit losses would have rapidly depleted your capital.

So while the market has averaged about a 10 percent annual return over time, its year-to-year fluctuations mean that you have to be defensive in how you calculate withdrawals from a retirement portfolio, especially if you plan on living off of it for many years (like more than 20) or want to leave something behind.

To find out how others do their math, we asked members of the Armchair Millionaire community to tell us how they figure safe withdrawal rates. Here is just one of the responses we received:

“I believe I will need $1million to retire. I arrived at that number by estimating the income I'll need, which is $30,000 to $40,000 a year, which will be 3 to 4 percent of my investment portfolio. Assuming my employer's pension hasn't gone bust, I'll be able to reduce my withdrawals from my investments a bit and still maintain my lifestyle when I'm 55. If I manage to keep my withdrawals to 3 percent or less of the portfolio, they should last, barring extreme circumstances beyond my control.” --mysticaltyger

Your annual rate of withdrawal is just one of many things you need to consider as you map out how to make your retirement savings last as long as you will. My guide provides some of the other important issues to take into account.

The stealthy nature of inflation--it slowly creeps up on us and catches us unawares--makes inflation the real bugaboo in retirement planning. While you may think, for example, that an annual retirement income of $60,000 will be plenty for your needs. However, at an average annual inflation rate of about 3 percent over the next 20 years, that 60 grand will only be worth about $37,000 in today's dollars. This means that to keep the same buying power, you have to increase the amount you plan on withdrawing each year.

Money left over. Do you plan to die broke, or do you want to leave something behind for your kids? In the first case, you'll need to plan for your life expectancy (plus a few years tacked on as a cushion). In the second case, you'll need enough for your life expectancy plus a chunk for your legacy. Of course, in both cases the trick is estimating your life expectancy. One guide is to look at average life expectancy (currently 77.2 years for Americans, according to the Centers for Disease Control). Or you can just be on the safe side and simply plan as if you will live until you are 95 or 100.

Other sources of income. Retirement planning is a tad easier when you expect to receive regular payments from another party (such as social security or a pension). While these payments for most people are seldom sufficient to pay for all your expenses in retirement, they can provide a healthy foundation for your retirement years. As you do your planning, consider how reliable these payments really will be. Pension funds can and to go under, and the long-term viability of social security, in my opinion, remains an open question.

Other sources of capital. Many people receive booster shots for their retirement nest eggs later in life, often during retirement itself. Receiving an inheritance, freeing up equity by downsizing to a smaller home and selling a business are three of the more common sources of extra capital. The catch with each one, however, is that you will not likely know when you'll receive this kind of infusion, or how much it will be.

Contact Information:

Lewis Schiff

Armchair Millionaire


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Lewis Schiff