Will Your Retirement Income Run Out?
The mantra of many retirement investing professionals is to invest in low-risk retirement bonds and stocks for retirement. However, there are other retirement income plans that ensure your retirement income stays with you through your retirement.
Find the best way to start taking retirement income out of your investments by asking financial question pertaining to your own life. Should I take money out of my senior social security? Do I take funds from my interest or dividend bearing securities? How about cashing out some of my stocks for retirement and using them as income?
To answer those questions and figure out which is best for you, the first step is to find out how much of your principal you can afford to draw off and still provide for inflation while providing you have enough retirement income to last the rest of your life.
Unfortunately, using an average rate of return (ROR) to project future income doesn’t work because your investments will not deliver that specific ROR each year. If your early retirement years are marked by less than average, or worse yet, negative returns, you will reduce the principal that remains to grow. This could result in you having to either reduce your income in later years, which inflation will make difficult, or you could run out of money.
A Trinity University study, which studied the impact of withdrawal rates and which combination of pulling out retirement portfolio investments caused the least amount of money lost, found that a 100% stock portfolio would have been able to provide a 6% retirement income, increasing each year with inflation, only 57% of the time. These findings mean that a senior who relied on a stock portfolio for this level of income ran out of money before 30 years had passed around 43% of the time. Given that life expectancies have risen, and many people retire earlier than age 65, this represents a sizeable risk.
The following is a list of conclusions the professors of the Trinity College came to in regards to safe keeping your retirement income and your retirement investments:
- Younger retirees who anticipate longer retirement payout periods should plan on lower withdrawal rates
- Bonds increase the success rate for lower to midlevel withdrawal rates, but most retirees would benefit from a stock allocation of at least 50%
- Retirees who desire inflation-adjusted withdraws must accept a substantially reduced withdrawal rate from the initial retirement portfolio
- Stock-dominated portfolios using a 3 – 4% withdrawal rate may create rich heirs at the expense of the retiree’s current consumption
- For 15-year or less payout periods, a withdrawal rate of 8 – 9% from a stock-dominated portfolio appears to be sustainable
