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I'm 60 years old and have an IRA worth about $700,000. I'd like to start withdrawing $15,000 a year after taxes in about four years. If I do this, how long can I reasonably expect my portfolio to last?
-- Jay, New York, NY
There are so many variables involved in this sort of exercise -- future inflation rates, returns on different types of investments, the possibility of running into a portfolio-zapping bear market along the way. You always have to allow for some margin of error in a long-term projection like this.
But given that Miranda warning, I'd say that you have an excellent chance of your portfolio lasting the rest of your lifetime, if you withdraw the money as you propose.
In fact, if you're keeping your withdrawal rate down because you're worried about running out of money before you run out of time, you're probably being too cautious. You can likely afford to pull out more without running a serious risk of your assets running dry.
So how do I arrive at this optimistic outlook?
First, a few assumptions. Just to be conservative, let's assume that your $700,000 doesn't grow at all between today and when you plan to begin tapping it four years from now. And although you don't say what tax bracket you're in, I'm going to assume you'll face a 25 percent rate. Then, to get your $15,000 after taxes, you'll have to withdraw about $20,000 pre-tax.
That means that your first withdrawal of $20,000 will amount to just under 3 percent of your portfolio.
By most standards, this is considered a very conservative withdrawal rate, even assuming that you increase the dollar value of your withdrawals with inflation each year to maintain your purchasing power. In other words, if inflation runs at 3 percent, you'll pull $20,600 from your portfolio the second year, $21,218 the third year and so on.
Most advisers recommend that you limit your initial withdrawal to about 4 percent of your portfolio's value if you want a more than 90 percent probability of your money lasting at least 30 years. The fact that you're starting with an initial withdrawal of less than 3 percent suggests you should have very little chance of outliving your money over the course of 30 years, and likely much longer.
To get a little better sense of how you might make out, I plugged your info into T. Rowe Price's Retirement Income Calculator. I assumed you started pulling $1,667 a month, or $20,000 a year, out of your portfolio at 64 and that you would make withdrawals for 40 years. (Hey, why not think optimistically?)
The longevity of your assets also depends on how you invest your money. The tool gives you a choice of seven portfolios ranging from one with 100 percent of assets to one with just 5 percent in stocks. For you I chose what I consider a very conservative, though not unreasonable, portfolio with 20 percent cash, 40 percent bonds and 40 percent stocks.
Finally, T. Rowe's calculator allows you choose a "simulation success rate" ranging from as low as 50 percent to as high as 99 percent. I figured from your question that you're not a "wing it" type of guy, so I assumed you wanted a 90 percent chance that your money would last at least 40 years.
I then clicked the "calculate" button, and voila! Up came your answer.
Yes, you could actually withdraw $24,000 a year and still have a 90 percent probability of your money lasting 40 years. In fact, because your withdrawal rate is so low, any of the portfolios will give you a 90 percent chance of your money lasting 40 or more years.
Does risk pay off?
The calculator results lead to an interesting question: if a more aggressive portfolio doesn't boost your odds any more than a conservative one, why take on the extra investing risk?
The answer is that not running out of money is only one aspect of managing your portfolio in retirement. There's also the question of how large your portfolio will be at any point along the way, and how much might still be left over for heirs.
By opting for a portfolio titled more toward stocks, your portfolio is likely to maintain a higher balance throughout retirement stocks than one overwhelmingly invested in bonds. Even if you have no desire to leave a legacy, that can be an advantage in the event you need to come up with extra cash for some reason (medical expenses, home repairs, whatever) later in retirement.
In any case, if you go to the calculator, it's easy to see how you make out under any number of different scenarios -- withdrawing more money, investing more or less aggressively, choosing a higher or lower margin of safety that your money will last, etc.
Again, keep in mind that what you're getting are probabilities, not certainties. And it certainly pays to re-run the numbers every year or so to get a sense of how long your money might last as you age and your financial situation changes.
Based on that re-assessment, you can always pull back your spending for a year or two if things look tight. Or, if the markets are kind and your portfolio's doing well, you may decide to loosen the purse strings and enjoy retirement a little more. Because the one thing we do know for sure is that you can't take it with you.
Tell us your story...If you interested in a free portfolio makeover by a certified financial planner, and you're willing to have your photograph and story appear in MONEY magazine, please contact us at firstname.lastname@example.org. Please include contact information in addition to a photo and your household members' ages. Additionally, please provide a general description of your current financial picture: income, investment goals and the amount of your savings, debt and investments.
Walter Updegrave is a senior editor at MONEY Magazine and is the author of "We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World."
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