Investment Risk and Rate of Withdrawal
February 15, 2014
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
But medical advances have increased the life expectancy of U.S. citizens. In 1950, the life expectancy of male children was 65 years, and a female child could expect to live to 71. In 2011, 50 percent of men who turned 65 will live to the age of 81. Women turning 65 in 2011 will see 50 percent of their number reaching 84, and 25 percent reaching the age of 90. In other words, one out of every 10 women turning 65 these days will live to see 100!
You must take life expectancy risk into consideration along with very prudent asset withdrawal rates, so that you do not find yourself out of money and out of options.
If you’re ready to start getting your estate in order and secure your assets for the “worst-case” scenario, please give our office a call at 630-585-5200 or 800-310-3100. Your first consultation is absolutely free. We’ll let you know what steps you need to take, right now, to protect yourself and your family. Call now.
Rick L. Law, Attorney, Estate Planner for Retirees.
Rick was named the #1 Illinois elder law estate planning attorney by Leading Lawyer Magazine. He has been quoted in the Wall Street Journal, AARP Magazine, TheStreet.com, and numerous newspapers and articles. Rick is the lead attorney for Law Elder Law, LLP, focusing in Estate Planning, Guardianship, and Nursing Home Solutions. His goal is to give retirees an informed edge when it comes to dealing with an uncertain future. Get flexible retirement strategies that work during good times and bad, plus information on how you can save your home and assets from being used to pay for long term care. Conveniently located off I-88 across from the Aurora Premium Outlet Mall.