Retirement payouts not always predictable

The Oakland Tribune

IF YOU'RE on the cusp of retirement, the No. 1 question on your mind is: How much of my savings can I spend per year without the money running out before I die?

It almost seems as though a cartel of brokers, financial planners, actuaries, economists and other assorted folks got together some time ago and decided that if a retiree had $1 million saved up, then that person can withdraw 4 percent a year ($40,000) and be covered for the rest of his or her life, adjusted for inflation. Period, end of calculation.

If such a meeting didn't take place, then how does one explain the fact that this infamous "4-percent rule" gets repeated over and over in financial publications, financial planner newsletters, mutual fund Web sites, and assorted other venues.

This prediction is off base not only because not everyone has a $1 million portfolio but also because it's based on pure guesswork. No one can predict beyond the end of the next minute just what is going to happen in the world of finance. Numbers that look ahead 20 or 30 years are sensitive to wide-ranging assumptions that we are not able to make with any degree of certainty.

Add to that the fact that 4 percent may be far too conservative. "If I had $1 million and my financial advisor told me I could only afford to withdraw $40,000 a year, I'd fire him," says Philip Cooley, a financial studies professor at Trinity University in San Antonio, quoted in Kiplinger's Personal Finance magazine. Cooley, who has spent many years researching how much money retirees can safely withdraw without fear of outliving their money, says those willing to accept a little uncertainty can take out as much as 7 percent of their portfolio each year.

On top of all that is the fact that the 4 percent rule, for most prognosticators at least, is based on liquid funds, rather than on the retiree's net worth. One big net worth item that most retirees can retreat to in the case of an emergency, or simply as part of plain financial planning, is the equity in his or her home, which can be accessed through cashing out, buying down or through a reverse mortgage.

Also, if the retiree was smart enough to embargo money in an individual retirement account and/or in a 401(k) or similar workplace plan now rolled over into an IRA, then the assets of these plans will continue to grow in value after retirement. That growth could lessen, equal or overrun the mandatory withdrawals from these accounts at age 70 and a half. An owner of a Roth IRA is even better off because it rolls on forever since there are no mandatory withdrawals. And retirees engaged in part-time work (jobs I hope they like) and can open a SEP-IRA, which can take contributions, and grow, beyond age 70 and a half.

Also left out of the equation is Social Security, which accounts for something despite the fact that doomsayers say the system will collapse in about 65 years. At least two economists, Robert Gordon of Northwestern University and Bernard Wasow of the Century Foundation in Washington, D.C., believe that the future collapse of Social Security and Medicare is overstated because there's no way to predict the rates of productivity growth and immigration in 2070. Immigration could be a factor because Social Security is a pay-as-you-go system with current workers creating benefits for current retirees.

Another way to look into your financial future is via a "retirement calculator" -- versions of which are all over the Internet. Dealing with the kinks and links is not easy, and besides, none of them agree, and so who are you to believe?

The best route is: 1) Don't worry yourself into an early grave, 2) be frugal in your spending but don't enter a state of tortuous self-denial, and 3) stay attached to the stock market, particularly stocks paying good dividend yields.




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