estate planning, Financial Planning
Investment Risk and Rate of Withdrawal
By Rick L Law, Senior Advocate and Estate Planner For Boomers and Seniors in Chicagoland. Many people do not understand the investments that they have chosen so it is not surprising that they do not have realistic expectations of the performance of their investments. One of my favorite books about retirement planning is, “High Expectations and False Dreams: One Hundred Years of Stock Market History Applied to Retirement Planning” by Jim C. Otar. Mr. Otar notes that the average life cycle of an investor begins with accumulation of assets, followed by withdrawal. The last 100 years have given each generation an opportunity to experience a long mega-bull market and a long mega-bear market, each lasting between 16 and 20 years. We are currently in a mega-bear cycle, which can be predicted to extend to 2016 or even 2020, based on historical data. Retirees who begin withdrawals from their accumulated assets during a bear market are punished by both the depletion of their assets by withdrawal and by the decrease in the market value of their principal. To avoid going broke in retirement, income investments must be maximized and total annual withdrawals from both stock and bond portfolios cannot exceed a paltry 4 percent per year. If withdrawal rates are held to 4 percent, then the accumulated principal stands a 90 percent chance of lasting through a 30-year retirement. Unfortunately, most people choose to withdraw assets during their retirement based on two false assumptions:
- That future gains will make up for excessive withdrawals; and
- That their life expectancy will be similar to lifespan of their parents