I think that the American public has largely tuned out the myriad studies showing that most households are woefully under-saving for retirement. Even if we’d prefer not to think about this issue, however, it is crucial to regularly check on how we are doing. There are two major questions. First, during your working years, are you saving enough? Second, during retirement, how much income can you sustainably plan to draw from your savings each year? The good news is that there are some simple tools that you can use to do a fast estimate of how you are doing, how much you need to save to stay on track, or how to get on track. Continue reading
The question of how to safely generate income from a retirement portfolio is one of the most challenging in financial planning. In the days when people had traditional pensions, their employers simply promised them a constant inflation-adjusted income for the duration of their retirements. As we have moved away from traditional pensions and into self-directed savings plans such as 401(k)’s and IRA’s, investors and advisors must create their own customized income plans. New research from Morningstar highlights what appears to be a better approach to creating a stable income stream from an investment portfolio. Continue reading
Remember those kids from grammar school who were always top of the math class? They grew up to become actuaries. According to the web site of the American Academy of Actuaries, an actuary is an expert in “putting a price tag on risk.” They use math, statistics, economics and finance to predict the likelihood of future events and then try to come up with solutions.
They also appear to be the only people in the world who really understand pension plans.
Risks in Retirement
The Society of Actuaries (SOA) recently did an in-depth analysis of its 2009 study of the key risks in retirement. Since these guys are all about risk, it seems worth paying a little attention to the issues they highlight. Continue reading
One of the most important questions that investors need to understand is how much income they can expect to safely draw from their portfolios over a long time horizon. This income problem is often characterized as an attempt to determine a safe or sustainable withdrawal rate (SWR).
I have written about sustainable withdrawal rates in a range of articles, as well as in detailed case studies. While there are many variations on the theme, the most commonly discussed outcome from SWR studies is what is called the ’4% rule,’ which states that you can safely draw an inflation-adjusted income equal to 4% of the value of your portfolio in the year of retirement. If you retire with $1 Million, you can draw $40,000 the first year, and then increase this amount each year by 3% to keep pace with inflation.
Questioning the 4% Rule
To begin any discussion of SWRs, it is important to understand the assumptions that go into the 4% rule. Continue reading