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Mar, 2011
Determine Your Asset Withdrawal Strategy
By S&P Financial Communications


The rate of annual withdrawals from personal savings and investments helps determine how long those assets will last and whether the assets may be able to generate a sustainable stream of income over the course of retirement. A number of factors will influence your choice of annual withdrawal rate. The following are three key considerations.

Factor 1: Your Age and Health

As you think about what your withdrawal rate should be, begin by considering your age and health. Although you can't predict for certain how long you will live, you can make an estimate. However, it may not be wise to base your estimate on average life expectancy for your age and sex, particularly if you are healthy. Although average life expectancy has risen steadily in the United States, reaching 77.6 years for a child born in 2003, there is a 50% probability that a healthy 65-year-old man could live to age 85 and a woman in good health could live to age 88. Moreover, there's a 25% probability of the man living to age 92 and the woman to age 94. If they retired at age 65, they could be withdrawing from their assets for 30 or more years.1

Factor 2: Inflation

Inflation is the tendency for prices to increase over time. Keep in mind that inflation not only raises the future cost of goods and services, but also affects the value of assets set aside to meet those costs. To account for the impact of inflation, include an annual percentage increase in your retirement income plan.

How much inflation should you plan for? Although the rate varies from year to year, U.S consumer price inflation has averaged just under 4% over the past 30 years.2 So, for long-term planning purposes, you might assume that inflation would average 4% a year. If, however, inflation flares up after you have retired, you may need to adjust your withdrawal rate to reflect the impact of higher inflation on both your expenses and investment returns. Also, once you retire you should assess your investment portfolio regularly to ensure that it continues to generate income that will at least keep pace with inflation.

Factor 3: Variability of Investment Returns

When considering how much your investments may earn over the course of your retirement, you might think you could base assumptions on historical stock market averages, as you may have done when projecting how many years you needed to reach your retirement savings goal. But once you start taking income from your portfolio, you no longer have the luxury of time to recover from possible market losses, as retirees and near-retirees during this latest market downturn have experienced firsthand.

For example, if a portfolio worth $250,000 incurred successive annual declines of 12% and 7%, its value would be reduced to $204,600, and it would require a gain of nearly 23% the next year to restore its value to $250,000.3 When a retiree's need for annual withdrawals is added to poor performance, the result can be a much earlier depletion of assets than would have occurred if the portfolio returns had increased steadily. While it's possible that your portfolio will not experience any losses and will even grow to generate more income than you expected, it's safer to assume some setbacks will occur.

Your financial professional can help you determine a withdrawal strategy that can minimize the drain on your portfolio.

1 Source: Society of Actuaries, 2002 Mortality Tables (most current data available).
2 Source: Bureau of Labor Statistics, January 2010.
3 Example is hypothetical and for illustrative purposes only. Your results will vary.

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©2010, Kelly Ruggles, Spokane, WA. Web site
Kelly C. Ruggles, Spokane, WA. is a fee-based financial planner located in Spokane.
Kelly C. Ruggles, Spokane, WA. President of American Reliance Group, Inc., a registered investment advisor.
Kelly Ruggles, Spokane, WA. is the author of "The Financial Playbook" for Retirement

Kelly C. Ruggles, Spokane, WA. Does not intend to provide personalized investment advice through this publication and does not represent the strategies or services discussed are suitable for any investor. Investors should consult with their financial advisors prior to making any investment decisions.