I published this a year ago, but it still seems relevant so I wanted to put it back out there. -Jay
A recent article
from Yahoo Finance (The Risks of Spending Your Retirement) had an interesting take on issues related to drawing income from one’s nest-egg in retirement.
Their emphasis was on market risk and taxes – which are particularly challenging issues for those approaching and in retirement. Here’s why.
Most Wall Street types advise clients that they can comfortably take about 4% of their nest egg out each year – and make it last as long as they do. For a couple with $1,000,000 socked away – that’s $40,000/year.
From an investor’s point of view, we can think of that as a 4% annual loss. That’s not a bad thing – it’s what you built that nest egg to do – but we have to think of it as if it were a market loss to your portfolio.
If the market grows your nest egg by 4% – the two essentially offset one another and the theory works. But when there’s a market loss – it compounds the 4% income draw you’ve already committed to. Keep eroding cash at that rate – and you could run out.
In the past – getting 4% wasn’t so hard. Sock it in CD’s and you could get most of that 4% and protect 100% of the principal. Not so easy today.
Even if you could offset your 4% draw with 4% gains each year – that means you’ll reach the end of your life with essentially the same amount you started with.
That’s great if your intention was to pass that money on. But you could have taken 6% out ($60,000/year) to age 90 and still passed on nearly $200k. That $60,000 buys a whole lot more lifestyle than $40,000 does – and isn’t that what retirement is supposed to be all about?
Taxes are the other issue. Unfortunately, what you were told 30 years ago about being in a lower tax bracket in retirement didn’t turn out to be so true. What’s more, tax rates realistically have only one direction to go (hint: it’s not down). That can put a further crimp on those grand plans.
So what’s a retiree to do? Invest aggressively – and losses along the way could cause you to run out. Draw down too conservatively and you compromise lifestyle. And your (not so) favorite Uncle can rain on the whole thing with the stroke of a pen.
There is a way to have protection from risk, protection from taxes, and maximize income that can’t be outlived. Your job is to find a financial advisor who can show you how.
