The Answer Guy
(MONEY Magazine) – Q I'm looking to retire in a couple of years. How long would $600,000 last me if I withdrew $31,000 annually? --Paul Caron, location withheld
ANSWER Perhaps the rest of your life. But you might not be able to afford the lifestyle you want.
Problem is, your question ignores an issue that's key to any scenario in which you imagine living off a lump sum: inflation. Though $31,000 a year may be more than enough to fund your current needs, it'll buy you substantially fewer goods and services two decades from now. That's why when you plan your retirement, you need to assume your spending will rise to keep in line with consumer prices.
You also have to leave wiggle room for your investment returns, which, like inflation, will be variable and unpredictable. Over the past half-century or so, a portfolio comprising 55% stocks and 45% bonds would have grown an average of 10% annually. Yet it also would have lost as much as 15% of its value in a single year. To increase the odds that you won't outlive your money, make a first-year withdrawal that's less than the aggressive 5.2% you're envisioning. Starting with a 4% payout, or $24,000, and adjusting yearly for inflation, results in an 86% chance your money will last 30 years; 5% initially gives you a 63% chance. To see how different variables affect how long your money will last, try retirement calculators such as those at troweprice.com/ric.
Q I want to buy and sell shares listed on the London Stock Exchange. Can I avoid paying a fortune in brokerage fees? --Arno Roost, Waldwick, N.J.
ANSWER Yes. At E-Trade, the cost for trading on the London exchange, as well as in other foreign markets to which the firm gives clients access, is the same as for trading U.S. stocks. That's $12.99 at most for trades of up to 2,000 shares--a lot less than the hundreds of dollars in fees you can pay other U.S. brokers for trading on exchanges farther afield than Canada. You'll have to place trades over the phone with a broker, but E-Trade plans to move the process online.
Not all foreign stocks require an overseas purchase, of course. Shares of many foreign companies trade (cheaply) on U.S. exchanges through what are known as American Depositary Receipts (ADRs). Hundreds more trade off the major exchanges. You can find these shares at pinksheets.com and easily trade them through your broker. But be warned: These off-exchange shares typically aren't bought and sold as frequently as ADRs on major exchanges. And the companies don't have to conform to U.S. financial reporting requirements.
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