by Pamela Yellen
Bank on Yourself.com
|
|
|
There are three words that could have the biggest impact on whether you enjoy a comfortable retirement... or you have to struggle and
forego life's luxuries – and even life's necessities.
But almost no one is talking about these three words.
And there's a good chance you've never even heard of them.
These three words could have more impact on your retirement lifestyle t
han living longer than you expected... or than being forced to retire sooner
than you planned (which happens to nearly 50% of Americans,
according to the Employee Benefit Research Institute).
The three words may sound a little technical, but I'm going to
make them brain-dead simple to understand.
The three words are: sequence of returns.
Specifically, the "unfavorable" kind.
It's a fancy way of saying that retirees who have
a big portion of their assets in equities and
mutual funds face the very real risk
that the market will fall as they are
withdrawing money from their accounts.
Many people plan to use the widely recommended "4% rule,"
which advises retirees to take out no more than 4% of the
value of their retirement accounts (adjusted for inflation) each year.
Studies show that rate of withdrawal has a good chance of making
your money last as long as you do.
(It should be noted that more recent studies show
that a 3% annual withdrawal is the maximum needed
to make your money last.)
That means that if you have $100,000 in your retirement accounts,
you can safely pull out $4,000 a year using the 4% rule.
If you have $500,000, you can withdraw $20,000 a year,
and if you have $1 million in your account,
you can take out $40,000 a year.
If you haven't thought much about what kind of lifestyle withdrawing
4% a year from your accounts would give you, I'm guessing you might
be feeling a little queasy right about now.
Oh! And don't forget to take whatever you'll have to pay
in taxes that you deferred in your 401(k)
or IRA off the top of that number!)
It's easy to see that if we experience another market crash of
50% or more – as has happened twicesince 2000 –
as you're nearing or already in retirement,
it could have a devastating impact on how much
you can withdraw each year.
If your million-dollar 401(k) suddenly becomes a 201(k) worth
$500,000, withdrawing 4% will provide you only $20,000 a year,
instead of the $40,000 you had planned on.
But here's where it gets really sticky... timing is everything...
When you run the calculations, you discover that the impact of a
market decline in the first few years of retirement is even worse
than in later years.
It turns out that when you begin to take withdrawals,
market volatility has a far greater impact than rate of return.
An unfavorable sequence of returns may make you have
to cut back significantly on your retirement lifestyle,
or force you to work longer than you had planned.
The BIG problem, of course, is that there is no way
to accurately predict when the next market crash
will happen, or where the markets will be
when you are ready to retire.
We may be at the beginning of the next major crash...
or several years away from it. Nobody knows for sure.
One way to protect yourself from this very real threat to your
retirement lifestyle is to diversify your assets.
What if a portion of your savings were in an asset that is
guaranteed to grow by a larger dollar amount every year?
That would be a favorable sequence of returns that translates
into financial peace of mind for life.
| 
No comments:
Post a Comment