April 2015 Bar Bulletin
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April 2015 Bar Bulletin

Hot Topic: Retirement Spending

By Bridget Burgess


"Will I run out of money?" For people at or near retirement age, this is a hot topic. And understandably so since retirement can last 30, 40 or even 50 years. The focus should shift away from maximizing returns to making sure our money will last. The magic number that lets us withdraw just enough to live comfortably, while allowing our portfolio to last, is the "sustainability rate."

Finding the sustainability rate that's just right for you is like trying to hit a moving target. Spending needs change, market returns vary, and resources ebb and flow. As you age, you may find you're actually spending more money - not less - since you have more time to travel, support your favorite causes or develop new interests. Your income sources may also change, as you get mandatory payouts from pension and retirement accounts, or sell the family home.

The 4% "Rule"

What can your portfolio comfortably afford to pay you? A lot of planners say 4 percent annually. That number is based on analysis done by William P. Bengen, a financial advisor and planner, who in 1994 published an article titled "Determining Withdrawal Rates Using Historical Data" (Oct. 1994, Journal of Financial Planning).

First, let's clarify what the 4 percent refers to: The idea is to withdraw 4 percent of your portfolio the first year of retirement. Each year after that, you take out the first-year, fixed dollar amount plus the rate of inflation. So, if you're starting retirement with a $1-million portfolio in 2015, you'd take out $40,000 this year and then $40,800 in 2016 ($40,000 plus 2% inflation), and so on.

The 4 percent rule works if you keep your portfolio fully invested - in a mix of stocks, bonds, cash, etc. - and the growth rate over time more than compensates for the 4 percent withdrawals. Here's the catch: With the 4 percent rule, your withdrawals may be too high if your investment returns stall or decline during the first few years of retirement.

Withdraw Less Initially

Given the current market environment - low yields, rising volatility and global uncertainty - some experts argue that the 4 percent rule is just too high, assuming a 30-year retirement. Instead, it's probably wiser to withdraw less than 4 percent in the beginning of retirement. How much less?

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