401K, IRA and Pension withdrawals

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  #16  
Old 07-03-2011, 10:11 PM
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Inflation is a problem and guessing what it will be is impossible. For an overall rate I use 4%. I think the 3% we see a lot is a little low and I hope the 4% is a little high. But then I use 8% for medical costs. I think this is close to what history shows. Look at the increases for the medicare premium since it started. Then for utilities I use 6%. No basis for this other than feeling as we go green these costs will go up faster that historic inflation. The going green will also put pressure on the 4% number. I also used 2% for SS increases. Probably too low but the current inflation formula understates a seniors true costs. I also use a 5.6% return on investment. Might be low but just look at the last 10 years and current interest rates. The spread between the inflation rate and the return is the key number. Being conservative I am hoping the spread I have is too low so my actual results will be a lot better.
  #17  
Old 07-04-2011, 04:01 AM
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rjm1cc. Good plan. My biggest concern also is inflation. Our idiots running things have printed so much money in the last 3 years that it will have to have a devaluation impact at some point in the next 5 years. You may be safe with 4% if you are considering a 25 plus year window, but for the next 5 years you need to look at 15% to 20%. And even that will not cover what they must print just to cover interest on what they have spent. I guess the only up side for us who are retired, downside for everyone else, is that this will also drive unemployment and interest rates much higher then today and we will be able to hire cheap labor and hopefully we will not be borrowing more money.

It really saddens me that we have forced our children and grandchildren into a position of a lower standard of living for the future. It is criminal what has happened.
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  #18  
Old 07-05-2011, 07:27 PM
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Hi Schaumburger,

While I realize that your questions here about retirement accounts are specific, I would like to offer a couple of general suggestions for you, in case they might help.

There is a book that I have talked about a few times here on TOTV. Making the Most of Your Money Now by Jane Bryant Quinn. It was published at the end of 2009 so it was written for this economy.

I like this book because if a money decision question comes up, I can go to this book, flip to the index, and almost always find an entry that will tell me what I need to know -- or at least help me to narrow my focus for further research.

It is not a cover-to-cover read. You will not need all the information in it. But it is a terrific reference. (There is lots of info on the different kinds of financial planners.)

The book is written in a conversational tone. Nothing esoteric about it. And for me, itís a lot faster start than wading through website after website looking for answers. I could say a whole lot more about why I like having this book around, but I am going to get lazy now and just put the Amazon link here. (The book is bargain priced right now. And I guarantee you will recoup your investment, and probably plus a few digits, if you decide to buy it.)

[ame]http://www.amazon.com/Making-Most-Your-Money-Now/dp/B0048ELE4U/ref=sr_1_1?ie=UTF8&qid=1309911328&sr=8-1[/ame]



Something else that has helped me is Kiplingerís Retirement Report. I have subscribed for years. The articles are short and timely and everything in every issue has something to do with retirement. This link will take you to the part of the Kiplinger site where if you scroll down the left side of the page, you will see the publication I am talking about. It is published monthly.

http://www.kiplinger.com/retirement/

I hope you do not feel like I am giving you a homework assignment. I promise there will not be a test. Really. Not even a pop-quiz. I promise.

It is just that when I read your questions, I thought about how I felt as I got closer to retirement. I thought it was like being in an airplane that was getting close to landing. Seatbelt fastened, I listened intently (sometimes tensely) for that beautiful sound of the landing gear dropping and locking perfectly into position. From your posts, it sounds like thatís where you are now. Listening for that landing gear. I wish you a smooth landing and a wonderful retirement journey.

Boomer
  #19  
Old 07-06-2011, 06:48 AM
Ohiogirl Ohiogirl is offline
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I cannot tell you how many retirement income calculators I have completed, and I am also tracking expenses via a spreadsheet. Possibly I'm a little obsessive/compulsive? But - it eases my mind, particularly because we retired fairly early (60ish).

I agree with educating yourself and reading all you can, and having a trusted financial advisor, but in the end, YOU are the one who has to make the decision, based on your income, lifestyle, and risk tolerance.

In my situation I will have a couple of small pensions kick in at 63-1/2 and at 65. I'm divorced and was a trailing spouse for years - didn't start working regularly full-time until about age 50 so the SS options are a little different, if I understood the explanation correctly (I went in person to a SS office in Ohio). I can get half of my ex's SS at 66 (not 62 if you are divorced) and then get my own at 70. Appeared to be a much better option for me as the difference is several hundred $/mo than if I took my own reduced SS at 62 - the other option. This only works if you did not remarry until after age 60 and were married at least 10 years. If I have this wrong, somebody please say something and I'll go in again to SS. Got over a year to get it right as I am still 60.

I am finding it very hard to take money OUT of anything - much harder for me than putting it in was. So far, I'm just using cash savings or non-IRA investments, but the day is coming when I will probably need or want to start using IRA money - then I'll have to decide whether or not to use ROTH or standard - another agonizing decision!

A friend of ours said something to me this weekend that hit home also. His parents are in their 80s and failing mentally and physically. He referred to the retirement 60s and the "go-go" years the 70s as the "slow-go" years, and 80s as the "no-go" years. I'm trying to keep this in mind, and not be so afraid to start spending it. Regardless of how we feel, we will not live forever. A good reminder that I will never be younger than I am now, and to go for the gusto (as long as I stay under that 4% withdrawal rate .
  #20  
Old 07-06-2011, 03:21 PM
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Why do people keep using the 4% rate for withdrawal?

I'm no mathematician, and correct me if I'm wrong, if you made 7% this year on your investment and took out 4% wouldn't your nest egg actually grow?

Just sayin!
  #21  
Old 07-06-2011, 04:05 PM
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It's a formula based on annuity payout algorithms. Supposedly if you have a portfolio worth $300000 invested in a 50 50 mix of stocks and bonds and you withdraw 4% which is $12000 a year, you should be able to withdraw that same amount for about 30 - 35 years adjusted for inflation every year. And it will work with the ups and downs of the market. Your not withdrawing 4% of what is left, but taking that amount as the base starting point and adding inflation each year. So yes some years it may grow 10% and the next year only 2% but over the life of the investment should work OK.

I set mine up to start with a 3.5% amount and will see how that works. You can always adjust up, but it is difficult to adjust down.
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  #22  
Old 07-06-2011, 05:17 PM
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I thought more of something like this:

Start with 4%
If the earnings for that year are 10% then put 6% in another fund and use the 4%
If the earnings are less than 4% then take money from the reserve fund to equal 4%
Hopefully your reserve will build enough to use it as a 'splurge' account at some point while your nest egg remains safe.

I guess in the end it's just as easy to take the 4%
  #23  
Old 07-06-2011, 10:28 PM
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Quote:
Originally Posted by Boomer View Post
Hi Schaumburger,

While I realize that your questions here about retirement accounts are specific, I would like to offer a couple of general suggestions for you, in case they might help.

There is a book that I have talked about a few times here on TOTV. Making the Most of Your Money Now by Jane Bryant Quinn. It was published at the end of 2009 so it was written for this economy.

I like this book because if a money decision question comes up, I can go to this book, flip to the index, and almost always find an entry that will tell me what I need to know -- or at least help me to narrow my focus for further research.

It is not a cover-to-cover read. You will not need all the information in it. But it is a terrific reference. (There is lots of info on the different kinds of financial planners.)

The book is written in a conversational tone. Nothing esoteric about it. And for me, itís a lot faster start than wading through website after website looking for answers. I could say a whole lot more about why I like having this book around, but I am going to get lazy now and just put the Amazon link here. (The book is bargain priced right now. And I guarantee you will recoup your investment, and probably plus a few digits, if you decide to buy it.)

http://www.amazon.com/Making-Most-Yo...9911328&sr=8-1



Something else that has helped me is Kiplingerís Retirement Report. I have subscribed for years. The articles are short and timely and everything in every issue has something to do with retirement. This link will take you to the part of the Kiplinger site where if you scroll down the left side of the page, you will see the publication I am talking about. It is published monthly.

http://www.kiplinger.com/retirement/

I hope you do not feel like I am giving you a homework assignment. I promise there will not be a test. Really. Not even a pop-quiz. I promise.

It is just that when I read your questions, I thought about how I felt as I got closer to retirement. I thought it was like being in an airplane that was getting close to landing. Seatbelt fastened, I listened intently (sometimes tensely) for that beautiful sound of the landing gear dropping and locking perfectly into position. From your posts, it sounds like thatís where you are now. Listening for that landing gear. I wish you a smooth landing and a wonderful retirement journey.

Boomer
Hello Boomer, Thank you for the advice about the book by Jane Bryant Quinn and Kiplinger's Retirement Report. I will have to check them out. Where I'm at on the retirement journey...well I'm going down the aisle of the airplane...looking for an overhead bin to store my carryon. Taking my seat...right in front of a toddler who is shrieking periodically during the 2 1/2 flight from Chicago to Orlando. Actually I'm describing what happened on my flight to Orlando this morning. Before I buy the book by Jane Bryant Quinn, I should go to an ear-nose-and throat specialist to have my hearing checked out. That child shrieking about split my eardrums.
  #24  
Old 07-06-2011, 10:37 PM
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Quote:
Originally Posted by Ohiogirl View Post
I cannot tell you how many retirement income calculators I have completed, and I am also tracking expenses via a spreadsheet. Possibly I'm a little obsessive/compulsive? But - it eases my mind, particularly because we retired fairly early (60ish).

I agree with educating yourself and reading all you can, and having a trusted financial advisor, but in the end, YOU are the one who has to make the decision, based on your income, lifestyle, and risk tolerance.

In my situation I will have a couple of small pensions kick in at 63-1/2 and at 65. I'm divorced and was a trailing spouse for years - didn't start working regularly full-time until about age 50 so the SS options are a little different, if I understood the explanation correctly (I went in person to a SS office in Ohio). I can get half of my ex's SS at 66 (not 62 if you are divorced) and then get my own at 70. Appeared to be a much better option for me as the difference is several hundred $/mo than if I took my own reduced SS at 62 - the other option. This only works if you did not remarry until after age 60 and were married at least 10 years. If I have this wrong, somebody please say something and I'll go in again to SS. Got over a year to get it right as I am still 60.

I am finding it very hard to take money OUT of anything - much harder for me than putting it in was. So far, I'm just using cash savings or non-IRA investments, but the day is coming when I will probably need or want to start using IRA money - then I'll have to decide whether or not to use ROTH or standard - another agonizing decision!

A friend of ours said something to me this weekend that hit home also. His parents are in their 80s and failing mentally and physically. He referred to the retirement 60s and the "go-go" years the 70s as the "slow-go" years, and 80s as the "no-go" years. I'm trying to keep this in mind, and not be so afraid to start spending it. Regardless of how we feel, we will not live forever. A good reminder that I will never be younger than I am now, and to go for the gusto (as long as I stay under that 4% withdrawal rate .
Ohiogirl, Got to agree with you about 80's being the no-go years for some people. My dad is 81, and he's in pretty good health for his age. I asked him when he was going to see the Cubs play this summer (he would always go to about 2 or 3 games per summer ever since I was a kid). He told me that he won't be going to Wrigley Field this summer -- too far to walk from the parking space into Wrigley Field -- about 3 city blocks. Felt bad when I heard that.
  #25  
Old 07-07-2011, 06:44 AM
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I'm doing some research on the "bucket" approach to savings withdrawals, which seems to be a good way to apply the 4% rule. Anyone who is concerned about making their money last (who isn't?) should check it out on line, and might want to consider buying "Buckets of Money: How To Retire in Comfort and Safety" by Ray Lucia. The strategy makes a lot of sense to me, and the market statistics seem to bear out the author's conclusions very well. The book is available on Amazon. And there is a lot of "bucket" information available generally on the internet as well.
  #26  
Old 07-07-2011, 04:37 PM
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Originally Posted by Ohiogirl View Post
A friend of ours said something to me this weekend that hit home also. His parents are in their 80s and failing mentally and physically. He referred to the retirement 60s and the "go-go" years the 70s as the "slow-go" years, and 80s as the "no-go" years. I'm trying to keep this in mind, and not be so afraid to start spending it. Regardless of how we feel, we will not live forever. A good reminder that I will never be younger than I am now, and to go for the gusto (as long as I stay under that 4% withdrawal rate .
I would think this statement is probably pretty accurate when thinking of the population as a whole. I have seen some research that supports the fact that your ability to make good decisions can decline as you get older. This can be a big problem as you may need to find someone to help with finances etc.
  #27  
Old 07-07-2011, 06:49 PM
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Originally Posted by Russ_Boston View Post
Why do people keep using the 4% rate for withdrawal?

I'm no mathematician, and correct me if I'm wrong, if you made 7% this year on your investment and took out 4% wouldn't your nest egg actually grow?

Just sayin!
If you dig into the 4% rule it gets to be very complicated. The actual withdrawal rate depends on your mix of investments, number of years you estimate for retirement, whether the stock market is at a high or low when you retire, inflation etc.
I think the origin was from a study done at Trinity University and that study just mentioned the 4% rule as one of a number of alternatives. At that time investment advice would have told you that you could live off of 8 to 10% of your investments. Thus the 4% was a big departure from what people in the investment field were recommending. There has been a lot of research since then and the 4% rule hold up in general discussions and hopefully makes the point that you have to be conservative in your withdrawals.
However when you get close to retiring you have to start paying attention to the problems you have with the rule. For example is the market is up and you have a million dollars you can with draw 40,000 per year. If the market crashed the year before that year and your million went to 500,000 you could only withdraw 20,000. The problem is the theory is that if you retired with a million you could withdraw 40,000, adjusted for inflation, for life but if you retired when the market was down you could only do 20,000 for life. This does not make any sense because you only have 1/2 million due to the market crash so you have to know how to adjust the rate for the type of market you are retiring in.
  #28  
Old 07-07-2011, 06:56 PM
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Originally Posted by Russ_Boston View Post
I thought more of something like this:

Start with 4%
If the earnings for that year are 10% then put 6% in another fund and use the 4%
If the earnings are less than 4% then take money from the reserve fund to equal 4%
Hopefully your reserve will build enough to use it as a 'splurge' account at some point while your nest egg remains safe.

I guess in the end it's just as easy to take the 4%
Yes, you have the general idea. And the 4% is designed to be very safe so you could actually end up with more assets when you die than when you started retirement. However if you move up to 6% you have a big risk that you could run out of money. But in your example, if the nest egg is increasing you might want to spent a little more in some years. But remember bad investment periods of 10 years are not out of the question. Just look at what interest rates are paying now.
  #29  
Old 07-07-2011, 07:08 PM
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Originally Posted by collie1228 View Post
I'm doing some research on the "bucket" approach to savings withdrawals, which seems to be a good way to apply the 4% rule. Anyone who is concerned about making their money last (who isn't?) should check it out on line, and might want to consider buying "Buckets of Money: How To Retire in Comfort and Safety" by Ray Lucia. The strategy makes a lot of sense to me, and the market statistics seem to bear out the author's conclusions very well. The book is available on Amazon. And there is a lot of "bucket" information available generally on the internet as well.
The bucket approach can be very helpfully. When you were building your retirement fund, buying shares of stock in a down market was good as when the market went up you made money. However if you have to sell shares in a down market you can not recover (you sold) as the market goes up. Thus the reason for the buckets.

I would be interested in your conclusion. I think I am at 5 buckets. I was at 3 a few years ago but as I get older I get more conservativce. The buckets would cover, for a minimum, needed expenses not covered by SS (any pension). However, if you have IRA's/401k's etc I would make sure I had the minimum required distribution for the next five years covered.
  #30  
Old 09-21-2011, 12:41 PM
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Well that really depends on what your invested in doesn't it? For example my 401K has a fixed (yes I said fixed) rate choice that is currently 5.77% guaranteed to next June. So even if I took out 5.77% it wouldn't even lower the amount of principal.

The 4% is a very safe conservative number to use but everyone needs to look at their total amount, what they earn for returns, and what amount of cash they need every year.
This is a study that you might be interested in. The executive summary and the tables are helpful, the text might not be of too much interest to a non researcher.

The point is stocks should be over 50% of your investments and you can go over the 4% limit.

http://www.fpanet.org/journal/Curren...oSuccessRates/

In case the link does not work this is from the Sept 2011 Journal of Financial Planning, Portfolio Success Rates: Where to Draw the Line
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