by
Carl Hampton
02/05/2007
A recently released study by the American
Association of Retired Persons (AARP) cited
that one of the highest concerns associated
with getting older was the lack of money
required to support oneself during
retirement.
For the past twenty years we have had
thousands of financial experts trying to
work out how much a retiree could safely
spend each year to ensure that they don't
run out of money. Yet, while the fear of a
“lack of money” remains a major obstacle
to retirement planning, most people state
that they have no idea what their retirement
needs might be, and confess that they have
very little knowledge about the entire
subject.
Great news! The results are in; we now have
a much better grasp of all the risks
involved.
This is what a sensible strategy may look
like though the problem here is that for
many of us “sensible” just won't cut it.
Here's what you do not want to do; reducing
your portfolio after retirement is a
treacherous mistake made by too many
retirees - after all, none of us know how
long we are going to live.
Taking this uncertainty into account most
experts will typically suggest one of these
two solutions. First, you could set a limit
on your initial portfolio withdrawal rate to
somewhere between 3% or 4% per year, that
equals $3,000 or $4,000 for every $100,000
you have saved. This would be well below the
5% and 6% withdrawal rates that used to be
advocated. William Bernstein, an investment
advisor in North Bend, OR said: "If you
take out 5% and you live into your 90’s,
there's a 50% chance you will run out of
money." This all sounds wonderful, but
here’s the next problem: the typical
household in America today, headed by a
55-64 year old, will have less than $90,000
in savings so a 3% or 4% withdrawal rate is
just not enough.
The second solution often advocated by
financial advisors, for retirees with modest
savings, is to buy income annuities. This
normally involves handing over your money to
an insurer; in return you receive a
healthy-sized check every month for the rest
of your life. You can of course also receive
a very handsome stream of lifetime income by
delaying your Social Security until you
reach your late 60’s. Many experts will
tell you to use savings to pay for your
early retirement years. This is very
prudent. The real issue here is most of us
don't really like the idea of delaying our
Social Security or buying income annuities,
because we fear we may not live long enough
to reap the benefits.
No-one is claiming that the two-act
retirement plan is ideal, but if you are
short on savings the second solution will
give you a reasonable source of income. You
get to leave your heirs a decent inheritance
should you die before you reach the age of
85. If you are lucky enough to live longer
than that you should be able to live
comfortably enough.
The bottom line is: Save Early, and Often!
Have an opinion or a question you would like
me to answer, then write me!
http://www.CarlHampton.com
