Get Your Finances Ready for Retirement"-How To Make Withdrawals From Your Portfolio
Monday, November 10, 2008SUSIE GHARIB: More and more retirees depend on their investment income to make ends meet. So in a bear market like this, one of the biggest questions facing retirees is: how much can you afford to take out of your investment portfolio each year? Tonight, Joe Collum gets some answers, as we help you "Get Your Finances Ready for Retirement.
JOE COLLUM, NIGHTLY BUSINESS REPORT CORRESPONDENT: When radiologist Lloyd Zand retired nine years ago, he and his wife Mardi were confident their investment portfolio was substantial enough for them to live out their golden years without worrying about paying the bills.
LLOYD ZAND, RETIREE: You haven't seen me on the street yet and hopefully you won', so it's worked out fairly well.
COLLUM: But four years into retirement, the Zands were concerned they might not be managing their portfolio properly. So they turned to Lane Jones at Evensky & Katz Wealth Management in Miami. Jones noted the Zands likely have to make their retirement finances last at least another quarter century. So the big question was: what percentage of their investments could they spend each year to help cover living expenses?
LANE JONES, CFP, EVENSKY & KATZ WEALTH MANAGEMENT: Most of the academic research says a sustainable withdrawal rate of no greater than 4 percent on an inflation-adjusted basis is about the right number in terms of being able to make it through most periods.
COLLUM: That widely-used number is based on the assumption that if 4 percent of the portfolio is taken out each year, the accumulated funds should last at least 25 years, even longer if the portfolio is invested successfully. But Boston University economist Laurence Kotlikoff says it's an arbitrary figure that doesn't consider the needs of different retirees.
LAURENCE KOTLIKOFF, ECONOMICS PROF., BOSTON UNIVERSITY: I call these rules of thumb rules of dumb really, because they don't take into account what you're investing in and also what your horizon is, whether you've got a spouse. They're really too simplistic to be useful.
COLLUM: Instead, Kotlikoff contends a retiree needs to adjust withdrawals each year to reflect changes in a portfolio's value. But after the steep market declines of 2008 and the resulting damage to investments, many retirees now want or need to take more out of their portfolios to cover expenses. That leaves financial advisers like Brant Keller to explain the cold, hard reality.
BRANT KELLER, CFP & PRES., FAC WEALTH MANAGEMENT: There's just no way that you can have somebody taking 6, 7 or 8 percent a year out and expect that you're going to grow that asset over time. So that's certainly an ingredient for demise, if you exceed that 4 to 5 percent threshold.
COLLUM: What that means is your retirement portfolio is a like a one- way ATM. If you take out too much money too many times, eventually you're just going to run out of money. So how can a retiree find cash to pay bills without depleting an investment account? Kerry Hannon of "U.S. News & World Report" says cut expenses or look for new sources of income.
KERRY HANNON, U.S. NEWS & WORLD REPORT: This is not something a lot of retirees want to hear but perhaps there is a way to find some part-time work to help just ease this current market period we are going through and kind of get along so that, until markets have a chance to recover.
COLLUM: Following that advice, Rich Devoll of Phoenix has opted to keep working in his real estate business so he'll be able to draw-down his portfolio by only 2 percent a year.
RICH DEVOLL, RETIREE: Our choice was to try to add income to our personal lives, in order to allow that investment portfolio to continue to grow, so that in some point in time, hopefully within five or seven years, we'd have enough for us to be able to completely live from that investment portfolio.
COLLUM: But while market returns are impossible to predict, one thing is certain: over-drawing from your investment portfolio will put you at risk of outliving your money. Joe Collum, NIGHTLY BUSINESS REPORT.
