How much can you withdraw from your retirement and
never run out of money?
You tell me how
long you are going to live and how much money you are going to spend each year
and I can calculate a reasonable safe withdrawal rate. But, no one has the answers to those
questions.
Baby boomers who are about to face life without a
paycheck have to figure this out. About.com has a very good article on this
subject; it is a quick review and point outs some of the many variables that
soon to be retirees face. It is worth
your time to read it. http://retireplan.about.com/od/alreadyinretirement/a/safe_withdrawal_rate.htm
Portfolio
Value – Withdrawal Rate
Two points in this article should make you
think. One is the effect your portfolio
value will have on your safe withdrawal rate.
For instance if you retired in 2007, the value of your portfolio would
have been much greater than if you retired in 2008. Just one year difference and the amount of
money you have to live on significantly changes your way of life. I don’t think many investors really
understand that point. Most people
think that since their portfolio has gone up about 10 percent every year since
the crash in 2008 and it will continue to deliver those returns. This is a foolish assumption.
The other point of emphasis is that a four percent withdrawal
rate is a commonly accepted safe rate of withdrawal. The experts have spent many hours
forecasting the rate of withdrawal based on life expectancies and portfolio
health. This article is correct, a four percent
withdrawal rate is accepted as a good rule of thumb.
Let
Your Savings Do the Work
I have a different take on the matter. I believe you can manage a portfolio of
dividend stocks and bonds that can create four percent. Therefore, if you can live on four percent,
you need not ever tap your principle.
Moreover, it will not matter how much the investments are worth. Your portfolio value can gyrate wildly and
still you get the four percent. Because
your savings are doing the work, they create the necessary money you need to
live on without having to dip into your retirement savings. Check out my 2013 portfolio of dividend
stocks.2013
Dividend Stocks - does not include bond or calls.
What
Investments?
Stocks that pay dividends and bonds that pay
interest are the investments that can deliver four percent for your retirement
income. In this blog I concentrate on
companies that deliver consistent and ever increasing dividends. Many of these companies also have covered
call option income potential. In
addition I use carefully selected bonds.
I use four criteria to select my dividend stocks. I use covered call options on many of these
stocks to create more income and to help me take profit and reinvest for more
cash flow. I also like below par
bonds. Bonds, however, are very
expensive in 2013. Yet, a good bond
comes available now and then such as the Alcoa Bond I covered in my post on June
24, 2013. http://www.themoneymadam.com/2013/06/bonds-alcoa-bond-for-your-retirement.html
Follow
an Investment Discipline
I find that ordinary investors can learn how to
manage a portfolio of dividend stocks when they have a disciple to follow. With experience, ordinary investors can
learn to safely use covered call options to improve portfolio return. Bonds are not difficult to understand, but
they are difficult to find. Ordinary
investors should get to know the bond desk at their brokerage and work with
them to find bonds that deliver greater income than a dividend stock; with
spread out maturities, and that sell at a discount to par. They’ll do the work for you, it is their
job. It is your job to decide which
bonds to actually buy.
To be fair, real estate, preferred securities, and
annuities are income instruments that many investors use. These are much more complex than stocks and
bonds. I do not cover those instruments
in this blog.
I know this much, a carefully selected portfolio of
stocks and bonds can deliver enough income to make worrying about the “safe
withdrawal rate” unnecessary.
TheMoneyMadam
