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Senior Citizen's Guide to North Jersey

Financial Scrambled Eggs

You’ve done a great job creating your retirement nest egg… but now that you need to begin pulling money out, how much can you take without fear of running out of money? Until recently, most advisors had a good answer for you. That is until the economic turmoil of the last decade. Now that answer has become a lot more complicated.

Many advisors used to say it was safe to pull out 4% of your portfolio a year without fear of running out of money. But here’s what happened in the last decade.

The beginning or the end?

If you began with a stock portfolio of $500,000 invested in the S&P 500 in the year 2000, and withdrew $40,000 a year… you would have run out of money by the year 2010. That’s because the beginning of the decade started with 3 straight years of losses and then you would have been hit again later in the decade with more losses.

What if you flipped the yearly S&P 500 returns so the losses occurred at the end instead of the beginning and you took the same $40,000/yr withdrawals (impossible I know but it will illustrate how the same exact returns arriving in a different order can really give you different results). If you’d been able to magically flip the returns, you would have ended the decade with $130,454. Not great when you started out with $500,000, but certainly better than being completely out of money in the scenario that actually occurred.

So what should you do? What with the economic volatility and low CD and bond interest rates, how much can you safely pull out?

There is a whole new industry out there catering to these worries like reverse mortgages, life-time payout annuities and such, but each of these too, have their advantages and drawbacks.

So what should you do?

2…4…6… but not 8

There are 4 different approaches you can take:

Take out 2%: 2% would be a very safe retirement withdrawal rate. The question is…is your portfolio big enough that withdrawing just 2% will give you the income you need? If it is, you have your answer… if not, keep reading.

Take out 4%: It used to be the magic number but as we’ve seen in the last 10 years it can fail.

Take our 6%: What! If 4% might fail, how could taking 6% possibly work? It’s just that, it could possibly work. T. Rowe Price found a 65 year-old with 40 to 60 percent in stocks and the rest in bonds has a 75% chance of making it to age 85*. Do you feel lucky?

Take out a yearly amount adjustment for inflation—I know we all like certainty, but as we’ve learned over the past 10 years… economic certainty probably isn’t in the cards. So what if instead of having a number fixed in stone, you instead adjusted your return based on what has happened over the past year and your current needs.

Not the perfect answer but one that could possibly give you both piece of mind and the lifestyle you dreamed you’d have all those years you worked so hard to put your nest egg together. You simply work with your advisor each year to pull out more when you can and less when you can’t. And keep in mind, the changes don’t have to be drastic. Even dialing back withdrawals by a percent or two in down years can add years to how long your money will last.

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