"Get Your Finances Ready for Retirement"-Stretching Your Retirement Dollars
Friday, April 10, 2009PAUL KANGAS: Once you've retired, another big financial concern is how do you keep from running out of money too soon? That's often closely tied to how quickly you draw down your investments. In another report in our series, Joe Collum looked into that.
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't, 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 that 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 lot 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're going through and - - 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, at some point in time -- hopefully, within five to 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.
GHARIB: As that report showed, deciding how much to spend in retirement can be a difficult dilemma. So let's return to our guests, Pamela Hess and Professor Bodie. Because every retiree faces many uncertain expenses on a limited income, I asked Hess if that means most retirees should simply try to spend as little as possible.
HESS: I think it's important to manage the amount that you're taking out and going back to some of the old rules that 4 percent a year of your current value of your portfolio is safe to take out so -- to insure that it doesn't run out, that you don't run out of money.
GHARIB: Professor Bodie, it seems like, you know, the really difficult part here is figuring out how much to withdraw from your portfolio and the difficulty is because you don't know how long you're going to live. Do retirees tend to underestimate their life spans and what does that mean for their financial outfit outlook?
BODIE: Yes, there's lots of evidence that they do. I mean, hard evidence that they underestimate how long they are likely to live and particularly, if its a couple, they underestimate how long the surviving spouse will live and it's -- you know, the expectation's that at least one of them will last into their 90s.
GHARIB: Miss Hess, do you agree with Professor Bodie on that?
HESS: Absolutely. We see that most people underestimate how long they're going to live, as well as how much they'll need to spend in retirement. People are living longer and our costs are higher, keep growing every year.
GHARIB: So, how do you think that retirees should deal with longevity risk, figuring out how long they're going to live and how much money they're going to need?
HESS: That's where having a specific situation, I think, tapping into different income annuity-type products, longevity insurance. There's a lot of really interesting products out there that can help people insure their longevity risk. It's very similar -- we insure a lot of other things in our lives, including our medical costs, our cars, homeowners insurance, where insurance will become much more of a mainstream part of retirement in the future.
GHARIB: Professor Bodie, do you agree with that?
BODIE: Completely.
GHARIB: Miss Hess, Professor Bodie, thank you so much for your insights on these important matters. We really appreciate your time.
HESS: Thank you.
BODIE: Thank you.
