Withdraw gently from nest egg, and it might last a nice while

Moneyline

Don't count on stocks for fat stream of cash

May 14, 2000|By Liz Pulliam Weston | Liz Pulliam Weston,LOS ANGELES TIMES

I am always reading articles about the "safe" withdrawal rate from a retirement fund. One study recently said withdrawal rates higher than 5 percent dramatically increased the probability of running out of money if the withdrawal period was longer than 15 years. That's nonsense. If I have $100,000 and withdraw 5 percent ($5,000) every year, my nest egg will last 20 years, even if I keep it under my mattress. If I put it in a certificate of deposit at 6 percent, I could withdraw $5,000 per year until the Fed freezes over and would have more than I started with. Even assuming a very conservative rate of return of 6 percent from a stock-dominated portfolio, one could withdraw 8 percent to 9 percent for a great deal longer than 15 years. Obviously I'm missing something.

Yes, you can keep your money in your mattress and pull out 5 percent a year. But by the end of 20 years, inflation will make your $5,000 worth a lot less than when you started. That's why most retirement calculators assume that you will adjust your withdrawal amount upward for inflation each year. You might start with 5 percent, but the amount withdrawn will be increased by, say, 3 percent each year. Doing that means you run out of money during your 16th year of withdrawals.

On to your CD example. In addition to losing ground on inflation, you're also going to have to pay taxes on the interest you earn. The higher your tax bracket, the more you'll pay. In the 34 percent combined state and federal bracket, you'll pay about $1,700 in taxes, reducing your withdrawal to $3,300. Adjusted for 3 percent inflation, your withdrawal would be worth about $1,800 in today's money at the end of 20 years.

You're right that an 8 percent to 9 percent annual return would put you in the clear and allow you to withdraw more than 5 percent over 15 years. Problem is the stock market doesn't guarantee steady returns. You might be up 20 percent one year and down 30 percent the next - and down 10 percent more in the third year.

The biggest problem for retirees comes when the stock market dives and stays down shortly after they begin their retirements. They're withdrawing from a shrinking pot, and if they don't cut back sharply, they risk running out of money much sooner than they expect.

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