Investing For Beginners – Free Investment Articles and Tutorials

You may have saved for many years and invested your money carefully. But when the money has to flow in the reverse direction, suddenly you are faced with a whole new set of challenging choices.

In Table 3, we assume you can get by with $60,000 the first year, increased annually by 3.5 percent. This lower withdrawal rate was sustained by every investment combination except the 100 percent fixed-income portfolio, which by the end of 2001 was doomed. Most of the other portfolios accumulated large amounts of money, more than $10 million in five cases, while restricting the investor to income of less than $200,000 a year.

With a fixed withdrawal, the concern is whether (and when) your portfolio runs out of money. But that’s not an issue with the variable withdrawals shown in Tables 4 and 5; there, the issue is the fluctuations in withdrawals and whether they will be sufficient.

In the fixed-dollar withdrawal plan, the choice between higher or lower withdrawals determines the likelihood that a portfolio might run out of money.

But in the variable withdrawal plan, the higher or lower withdrawal percentage determines whether the investor is likely to have more to spend early in retirement or more later in retirement. Eventually, less becomes more and more becomes less. For example, the tables show that for the first 14 years, the 8 percent withdrawal rate produces higher distributions. But starting in the 15th year, 1984, withdrawals are higher with the 6 percent withdrawal rate.

The reason is easy to see: For 15 years, money has been left to grow in one portfolio instead of being spent. From that point on, the portfolio that gives less (in percentage terms) will actually give more (in dollars).

Assuming a retirement age of 65, this 15-year turning point comes at the age of 80. Retirees who live longer than that can reap the benefits of taking out less during the earlier years of retirement. However, as retirees grow older, their health and vigor usually decline. Many retirees who postpone spending until age 80 won’t be able to take full advantage of their larger spending power. Worse, retirees who are too optimistic about their investments and spend more than they should in the early years may have to cut back significantly as they live longer.

You’ll also see in the tables that the larger variable distribution results in a much lower year-end balance after 30 years of retirement. This means a lower estate — $2.4 million for the retiree who withdrew 8 percent vs. $4.6 million for the retiree who withdrew only 6 percent.

As these tables show, planning a carefree retirement is a series of tradeoffs. Winding your way through them requires careful thought and discussion. Unless you have more money than you think you’ll ever possibly need, you must make some difficult decisions, the outcome of which will depend on future developments beyond your control.

But if you choose carefully among the alternatives and invest intelligently while controlling your risks, you can indeed make your retirement dreams come true

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