Begin with age in assessing retirement needs

Money Talk

Your Money

September 19, 2004|By MATT LUBANKO

I am 62 years old. I have about $300,000 invested in my company's 401(k) plan. What should I think about when managing these and other retirement savings?

- O.G., Chicago

When you retire - or when you approach retirement - you should repeatedly ask three questions:

How long do you expect to live?

How slowly or quickly do you plan to spend your savings?

How do you plan to invest your savings?

You can answer Question No. 1 with a life expectancy table.

You can answer Question No. 2 with several online calculators, or academic studies (your pace of present and future spending is critically important to ensuring that your savings will last).

And you should probably answer Question No. 3 with a review of historical statistics, to see which asset allocation formula (the percentages of your assets you invest in stocks, bonds, and cash) might work best for you.

Let's begin with the first and, perhaps, most discomforting question: how long you might live. In the back pages of "IRS Publication 590: Individual Retirement Arrangements," the so-called "uniform table" says a 62-year-old person can expect to live another 23.5 years, to age 85.5.

Whatever your age, and whatever your life expectancy, take this number fairly seriously - but also with a grain of salt. Nobody can predict how long you will live, not even the best actuaries on the planet. But you should at least try to make educated guesses about your life span.

How long you live determines how much money you might need; life expectancy should also influence how much you plan to spend to ensure your money lasts as long as you do, said Philip Cooley, professor of finance at Trinity University in San Antonio.

"A person expecting to live 30 more years obviously has to be a little more thrifty than a person with just five years to live," said Cooley, co-author of an academic paper titled "Retirement Savings: Choosing a Withdrawal Rate That is Sustainable"; the paper is available online at http://www.aaii.com/promo/mstar/feature.shtml.

That brings us to Question No. 2: How much do you plan to spend?

Here you must set an annual target: 4, 6, 8 or 10 percent of your assets that can be easily converted into cash. Example: Agree to spend 6 percent of your 401(k) plan savings of $300,000 and your budget for 2004-2005 would equal $18,000 (this spending plan excludes Social Security and other sources of retirement income you might have). You might choose to keep your 6 percent spending target in subsequent years, but your yearly budget would depend on the value of your liquid assets. If your 401(k) balance increases in value, even after you spent $18,000 in 2004-2005, your yearly budget could increase as well.

"You can't withdraw 10 to 12 percent a year, and expect your savings to last," Cooley said. Taking average annual rates of return for stock and bond portfolios into account, you'll be much better off if you put a tighter lid on your rate of spending: 6 percent to 7 percent a year, Cooley said.

Phase 3 of your three-part retirement questionnaire - your investments - is fairly simple.

Think 50-50: 50 percent in a broadly diversified stock portfolio and 50 percent in a diversified portfolio of bonds and cash. This 50-50 portfolio, based on a review of investment performance over the past 50 years, appears to be optimal for retirees in their 60s. The stocks provide growth, to minimize, and possibly eliminate, the ravages of inflation. The bonds produce income and cash flow, to reduce the likelihood of your having to sell stocks to raise cash during a bear market, said David Darst, author of The Art of Asset Allocation: Asset Allocation Principles and Investment Strategies for Any Market.

"The 50-50 mix has a good track record. It is generally neither too conservative nor too aggressive for retirees," said Darst, managing director of private clients at Morgan Stanley in New York.

Matthew Lubanko is a columnist for The Hartford Courant, a Tribune Publishing newspaper. E-mail him at yourmoney@tribune.com.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.