Retirement - Will I Run Out of Money?

Will I run out of money in Retirement?

Most likely, our greatest fear as we are nearing or in retirement can be stated in 8 simple words; "Will I run out of money in retirement?" I can see the wrinkled nose and sweaty palms start to kick in as the stress levels rise after someone asks that question. Moreover, it's not an easy quantifiable answer. It's better addressed as "it depends" since it is dependant on various moving parts such as interest rates, inflation, withdrawals, etc. that muddies the income and savings waters.

As a Retirement Counselor, I have to sit back, take a deep breath, and then start to outline the events and circumstances that "could" result in a shortfall of money during your retirement. In this blog post, I will explain a few of these, along with some 'traps' and 'potholes' to look out for on the road to (and in) retirement.

First off, "running out of money in retirement" needs a proper definition. Do you mean running your investments and savings plans to zero? Or do you mean running out of INCOME that those investments can produce? Or is the better question still, "will my current lifestyle be reduced in future years by my choice of investments today", or "how can my current plan to live in retirement be re-worked so I increase my odds of not running our of money" You have to be specific with your question to allow your advisor to give you a more specific answer based on the economic assumptions and historical outcomes.

Once your question is framed in an succinct manner, next you must consider what you are comfortable doing. What is your experience, temperament and willing risk level? Follow me here. If you're a saver and like bonds and CD's, and think stocks are risky, then say that. If your retirement plan owned mutual funds and they worked out, then you can stomach some risk of owning stock-based investments . Where I find most investors get side-tracked is when they do things that are really against their nature or experience, and they allow emotions to color their thinking, often to their detriment. Also, they don't think things through money-wise or they think too much and change their strategy so often that no undertaking has a chance at success. Let's look at some numbers and options that could help you with your retirement planning.

Consider a retirement portfolio (IRA, brokerage account, etc.) that contains $50,000 in bonds and $50,000 in stocks. The stocks are high quality and pay dividends equal to 2% per year. The bond portion pays 5% in interest income. So that's $1,000 from stock dividends plus $2,500 in bond dividends totalling $3,500 income per year. Not bad; that's close to $300/month in income. If the bonds and stocks continue to pay, then it's fairly safe that your income will stay level, or even rise over time as the stock companies increase their dividends if business does well.

Appreciation vs. Income: Where investors go awry is when they confuse 'appreciation' with 'income'. Appreciation is the rise in value of a stock, bond or mutual fund. Income is the earning of dividends or interest from a stock or bond or mutual fund. From my example, what could happen to de-rail your efforts and lead you to running out of money prematurely? Answer: Spending more than you earn.

Suppose your stocks go up in value 25%, to $62,500, and the bonds stay at $50,000. Now you have $112,500 total, right? You may think - OK, now I'll take $1,000 more from my account each year since I've made some money in my stocks - you now take $4,500, or
$375 a month. Whoa there big spender! Where are you getting the extra $1,000? You have to sell some stock(s) or bond(s) to get it ... you are now spending your principal, since your dividends and interest are still $3,500 per year. Spending beyond what your portfolio
earns is spending your principal. For every $1,000 in stock you sell, you are reducing your future income by $20/year (2% of $1,000, and $50/yr. for every $1,000 in bonds sold). It's emotionally warm to think that way in a bull market, but how 'bout when the 25%+ bear
market hits, (we just had one) and your account is now down to $87,500 ($50,000 bonds + $37,500 stocks). De-rail your retirement pothole #1: you will never run out of principal if you don't spend any. Rule: 1a: If you decide to spend principal in the good times, be
prepared to stop spending principal in the bad times. Remember: income from dividends and interest is fairly stable. Appreciation from stocks and bonds is not stable, and cannot be relied upon year to year. Better idea: when stocks rise, move some of that appreciation (gain) to the bonds; now you will earn more income - 5% from the bonds vs. 2% from the stocks.

Taxes and Inflation: The second area of real imporance ignored by most investors, the media and and to some extent by the investment companies, is the effects of inflation and taxes on your retirement money. It's what you keep that counts. We all hate taxes and the darn tax code is changed so often by Congress that hardly anyone can keep up with it. Inflation is a bit easier to figure out. To keep the example easy, say you are earning 5% on your combined stock
and bond portfolio. Taking 15% in taxes away, you now earn 4.25%. Now subtract 3% inflation, and you're left with 1.25% - not much of a gain now, is it? De-rail your retirement pothole #2: be aware of the inflation and tax hits that will occur when you design your retirement income plan.

Maximum withdrawal rates. Multiple studies on this topic have been penned in the last 25 years, and the consensus is a 4% to 4.5% rate of withdrawal would prevent running out of money during a 30 year retirement time frame using 50% stocks/50% bonds. This plan does not consider principal vs. income like above. You take your starting account value and withdraw 4 -4.50% year after year. Another plan I have seen put forth is to withdraw your portfolio's total return (appreciation + income) after subtracting the inflation rate. For instance, your portfolio gains 10% for the year (8% appreciation + 2% income); you can withdraw 7% that year. Why? Because if you earn 10% and inflation is 3%, then you are leaving that 3% gain in the portfolio to offset inflation in the portfolio that you will need next year. That would take some mental math on your part, because you would adjust your income each year depending on your portfolio value and the cost of living (inflation) from the prior year. Where this plan could backfire is when your portfolio loses money, such as last year, so that no withdrawals would be taken. Can you put your retirement income on hold and await better times-probably not. De-rail your retirement pothole #3: Be flexible; work out more than one plan for your retirement income, using more than one portfolio or investment.

Finally, remember - I've used one example of a 50%-50% portfolio mix today. You may own other investments that guarantee your income, such as a pension, social security or an income annuity. The safer the guarantee, the more choices you will generally have with your remaining investments.

Bonus questions & FREE Retirement Calculator. If you earn 5% each year on your portfolio, and withdraw 7% of your principal each year, plus a 4% increase each year to offset
inflation, in what year will your account reach zero? Answer: 15 years.
Reply to this blog by clicking on the comment link below, or send me an e-mail to: barry@stetsonwealthmanagement.com and I'll send your paper retirement planning calculator by mail or pdf file.

I hope you've gleaned some useful information today.

Barry Unterbrink
Chartered Retirement Planning Counselor; Portfolio Manager
(954) 719-1151

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Recession End? What To Contemplate Next?

If the 2007-2009 time period were to somehow in the end encompass the economic collapse and surrounding recession, then what's the next actionable course of action to contemplate with your money? That, friends, is the $64,000 (no, let's up the ante and say $64 billion) question. As investor's, we have to look forward to what the future could delve out to us if we are to prove resilient and flexible to profit from the opportunities ahead (or avoid the roadblock or cliff just around the next turn). For many who don't do our homework or fail to assemble plausible outcomes based on past market behavior, there remains little doubt that costly mistakes will embed themselves in the outcomes. I've observed over the years the one-liner "this time it will be different" often precedes anything but ... that is, investor hope and greed extrapolate into the future the continuing of the current good times or bad times. The trouble with that reasoning is: by the time the good or bad times are evident, most of the damage has already been done. By then it's really in the last innings of the boom or bust cycle. There are exceptions, of course.


The current bull market rally in the stock market is a case in point. My last blog on the market's condition Does This Rally Have Legs? was penned in mid-March 10 days after the now-important and recognizable market low near Dow 6,600. The gains in the average stock prices since then has been very enticing and rewarding: Dow Industrials, up 1,685 points, or +27%, the S&P 500 Index, up 220 points, or +33%, and the Nasdaq Composite Index, up 423 points, or +33%. The current rally, which has taken off "like a scalded dog" the past 10 weeks, no doubt took many by surprise. This begs the question then, what do we do now?


If you owned stocks or stock mutual funds along the way up, your should continue to hold them based on your risk level and stage in life. The market's rally may poop put at some time, or roll over and decline substantially, so protecting your recent gains is important. If you're up 25%, I would not give back more than 7-10% of that should prices fall back again. Remember, cash and bonds should hold a place in your portfolio for what's not invested in stocks. Bonds, which had a decent 2008, have not performed well so far this year. The competing stock market, and the flood of the massive new stimulus money contributes to the rise in interest rates. The Government's ability to raise more money is at a higher cost, thus depressing bond prices. The 10 year Treasury bond's yield rose from 2.24% to 3.45% this year, while the 30-year variety moved up from 2.7% to 4.4%. That's a huge jump in rates in just 5 months!

Inflation should be watched carefully with every report. As it heats up in future months and years (which I believe it will), then your investment income will suffer. Consider: if your portfolio is growing at 8% and inflation is 4%, then you can afford just a four percent withdrawal rate to keep money protected from inflation-risk. During Jimmy Carter's reign, inflation averaged 8%, so you had to curtail your withdrawals for some time back then. Interest rates spiked up then, killing your bond portfolio value also. It would take a delicate balance and some luck then to hold onto your principal and generate a decent after-inflation income.

If you buy off on the scenario that I have outlined above, then consider using a guaranteed income annuity to fund part of your retirement income. Insurance companies guarantee your income in future years. Example, investing $100,000 today, a 51 year-old could receive $7,512/year for life when they are 56; wait until age 60 and the income jumps to $10,282/year. That's minimum income - it could be higher if the markets your account balance is tied to performs better. Ask me for a complete illustration on how this works.

Be sure to read the blog post before this one on Gold and Silver investing; it could be rewarding to you also. Be safe out there investing!

Barry Unterbrink
Chartered Retirement Planning Counselor