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Retirement Withdrawals

Comments on “Finding the Right Withdrawal Rate: One Key to Portfolio Sustainability,” by Maria Crawford Scott, in the July 2012 AAII Journal:

I’ve been retired for 20 years, running a portfolio of 60% equities and 40% fixed income. My expenses are covered by Social Security, a small pension and withdrawal from savings.

If you’re going to manage your own portfolio and withdrawal rates, you need to understand tax law, tax brackets and how required minimum distributions (RMDs) are calculated. Everyone is different, and one size does not fit all.

What worked for me was to control my spending (stick to a budget) and take more out of my tax-deferred accounts when the market was up, but only enough to keep me in the same tax bracket. This reduces your RMD when you reach 70½ and increases the taxable account that you can withdraw from without increasing your tax rate. Again, any standard withdrawal rate may be a starting point, but will probably not benefit most people. There is no substitute for knowing the tax law, having a diversified portfolio and

—Kenneth Dillman from Colorado

Using 30-year averages is a bit unrealistic. Most of us over 65 are concerned that another precipitous drop in the market would essentially wipe out our stock investments.

It is very difficult to maintain a “relatively safe” return of over 4% in order to be able to withdraw at that same rate. I have decided to annuitize a good portion of my savings into a single-life, no-beneficiary annuity (actually, diversifyings among the top-rated insurance companies). I can receive a 7.8% return of investment and principal for life. If there is money left over in early retirement, then those dollars can be reinvested into “riskier” assets. The key is to maintain enough fluidity for emergencies and potential investments if the market really takes another dive.

—Bob Brooks from Prescott, Arizona

An alternative approach bases the withdrawal rate for each upcoming year on the value of the portfolio at the beginning of the year, along with the retiree’s current life expectancy. This gives a substantially more irregular rate of annual return than the Bengen model [origin of the 4% rule] that the author outlines, but has no risk of running out of money before you die and takes automatic account of fluctuations in the year-to-year value of the portfolio.

This approach to withdrawal from retirement accounts has never been popular with financial planners because it has never been popular with their clients, who generally want a fixed, lifelong stream of inflation-protected income. I believe that with some effort to carefully explain this approach, its risk/benefit trade-off would look much more attractive than that of the Bengen model.

—Robert Krisch from Pennsylvania

Your article is interesting and useful. However, it does not address the issue of the market conditions in the starting year. For example, the resulting dollar amount of the withdrawals would be significantly different if the first year’s withdrawal were based on year-end assets in 2007 versus 2009. Perhaps one can average the last three years prior to the initial year. Otherwise, some provision must be made for the systematic adjustment of the actual withdrawal amount.

—Herbert W. Bell from Taylorsville, North Carolina

Smart Investing Rules

Comments on “The Good Investor Rule: Focus on How Not to Lose Money,” by Steven Sears, in the July 2012 AAII Journal:

This is a much appreciated article. It confirms an activity in which I reluctantly read several diverging investment perspectives before making a decision involving any investment change. Although it is difficult to read something one doesn’t “believe,” it is often a helpful practice.

—Rick Hartwell from Kansas

In some cases, people sell too soon because they want or need to spend their money. Successful investing requires discipline to a perhaps exceptional degree.

—Thomas Clasen from Virginia

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Understanding Financial Statements

Comments on “The Cash Flow Statement: Tracing the Sources and Uses of Cash,” by Z. Joe Lan, in the July 2012 AAII Journal:

I have read and copied all four articles so far. They are excellent. Mine are in a binder for continual referral and as loan-out to members in my small financial investment group.

—Richard G. Post from Vero Beach, Florida


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