Modest portfolio withdrawals the key for retirees


Last year was brutal for investors, but probably more so if you're a new retiree. Your nest egg could be significantly smaller today, just when you're starting to tap it.

But before you get too discouraged and conclude that you'll have to go back to work, it's time to take a look at where you stand.

Kirk Kinder, a financial planner in Bel Air, has been doing just that for some of his retired clients who lost 10 percent to 18 percent in their portfolios last year. These retirees, who usually make modest yearly withdrawals from their portfolios, will not have to change their lifestyle even after going through the worst stock market since the Depression, he says.

"We basically are sticking with the same investment plan, and they will be fine - barring three or four more years like this one," Kinder says.

Granted, these retirees were not entirely invested in stocks, and their losses were less than the overall market. But a key to their success is their modest withdrawals of no more than 4 percent a year. By not taking out a big percentage of assets, particularly when retiring in a bear market, retirees increase their chances of not running out of money later.

T. Rowe Price Associates recently calculated the impact of withdrawals on new retirees given last year's steep decline.

The Baltimore investment company generally advises that new retirees should initially withdraw 4 percent from their portfolio, and thereafter increase the dollar amount by 3 percent a year to keep up with inflation.

If you had a $1 million portfolio, for instance, you would take out $40,000 the first year; $41,200 the next and so on. Usually, this strategy would give you a 90 percent chance that your money would last 30 years in retirement, assuming your portfolio was 55 percent stocks and 45 percent bonds, Price calculates.

But what if your first year of retirement started out with a 30 percent plunge and your next egg shrunk to $700,000? Now you have only a 40 percent chance of outliving your money, Price figures.

"The key is there are things you can do about it now," says Christine Fahlund, Price's senior financial planner.

One option, she says, is to strike a compromise. Keep your yearly withdrawals the same without an increase for inflation for five years. Under that scenario, the success rate could climb from 40 percent to 60 percent.

On top of that, if the stock market's returns are higher than average during the next five years - which has happened after big losses in the past half-century - then your success rate could rise to 74 percent, Price figures.

Still, that doesn't put you near the 90 percent success rate that most new retirees desire, Fahlund says.

To get back to that point, you would have to reduce the amount you take out annually. Using the above example, annual withdrawals for the next five years would have to fall to $30,000.

Cuts are difficult for retirees, Fahlund says. And with the stock market falling so much in so little time, many retirees are not prepared to reduce spending, she says.

For them, the less painful option might be to forgo any inflation increases on their withdrawals in the next few years, which would be similar to reducing withdrawals by 3 percent a year, she says.

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