Making the money last is the first concern for retirees


September 29, 2002|By EILEEN AMBROSE

RETIREES Donna and Peter Baron of North Potomac are in their early 60s and figure they might live well into their 80s or longer. Their goal: not to outlive their money.

"That's absolutely paramount that we don't run out of money and expect someone else to take care of us," said Donna Baron, 60, who retired five years ago as a representative for LexisNexis.

When David and Joan Colescott of North Carolina retired three years ago, he figured they could safely withdraw 8 percent of their portfolio to live on each year. He isn't concerned about leaving money to his heirs.

"I like that bumper sticker, `I'm spending my kids' inheritance,'" said the 67-year-old retired real estate broker. "I've already warned the kids."

In those ways, the Barons and Colescotts are like most retirees, according to T. Rowe Price Associates, the Baltimore-based mutual fund company.

Three years ago, Price launched its Retirement Income Manager, a paid service in which an adviser, using a computer program, helps retirees figure how to invest and how much to spend each year so that they won't run out of money.

Since then, more than 1,000 people with assets ranging from $150,000 to $1 million have gone through the program. What Price has learned about them has led it to adjust the program and consider other changes.

Price has found that retirees' biggest worry is running out of money during a retirement that the majority expect to last 21 to 35 years. Even so, many assume that they can safely pull 8 percent a year from their portfolio, twice the amount that many financial experts recommend at the start of retirement.

Drawing too heavily in the early retirement years, particularly in a bear market, could leave retirees little or no money left in later years for themselves, let alone for heirs. Leaving money to heirs, though, is not a big issue for 82 percent of clients, said Christine Fahlund, Price's senior financial planner.

"They say, `They can get whatever is left,'" she said.

Based on Price's observations and those of retirees, here's some advice on improving finances in retirement:

Start conservatively. How much retirees withdraw annually from portfolios is far more important than how the money is invested, Fahlund said.

Those approaching retirement typically figure their investments will earn 10 percent a year, which is why they assume an 8 percent withdrawal rate, Fahlund said. That rate could work if every year was a bull market, but it can be devastating during a bear market if investors sell when prices are low.

Price generally recommends a 4 percent withdrawal rate in the first year, 5 percent for someone well into retirement, when the money needn't last as long.

Thereafter, retirees can increase the dollar amount of income each year by 3 percent to keep up with inflation. Or, if the market goes gangbusters again, retirees might be able to withdraw more, depending on their situations, Fahlund said.

A Price adviser talked David Colescott into withdrawing less than he had earlier figured he would. He retired in 1999, when the market was soaring.

"In the first year, we had more income in the portfolio than we withdrew. Since then, we have been eating a little of our seed corn," he said. "We eat a little bit each month, but it is not dramatic. It doesn't concern me, but it drives my wife crazy."

He's thinking of reducing withdrawals next year to make their money last longer.

Being conservative also helps with asset allocation - how money is spread among stocks, bonds and cash - Fahlund said. Clients typically have 40 percent to 60 percent of their portfolios in stocks and are encouraged not to go higher, she said.

While the Barons were saving for retirement, they had close to 70 percent of their money in stocks. After Peter Baron retired three years ago, the couple shifted their holdings to about 39 percent stock, 59 percent bonds and the rest in a money market fund. They're concerned about the bear market.

"Like everybody else, we don't want to see our retirement savings just fall apart here," said Peter Baron, 61. "We're in it for the long-term. We don't want to sell at the bottom."

Set up an emergency fund. Often, when retirees can't live within the 4 percent withdrawal rate, it is because they have no money set aside for emergencies, Fahlund said. "They had unexpected expenses of all kinds. `My refrigerator blew up. What do I do?' " Fahlund said.

Retirees need cash outside their portfolios so that they aren't forced to sell investments to pay for emergencies, she said.

Be realistic about income needs. The rule of thumb has been that retirees need 70 percent to 80 percent of their pre-retirement income. The Colescotts and Barons find they spend about the same amount they did before retirement.

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