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Tapping into Your Egg Nest So you've finally made it to the point where you want to stop working, either fully or partially, and you want to tap into the money you’ve saved all your life for retirement. There are basically three approaches you can take and, of course, variations on each. Here you find an appropriate percentage of your portfolio and withdraw an amount based on that percentage each year. For example, there is research which has shown that an appropriately balanced portfolio can withstand a withdrawal of 4% over any market cycle. But, let’s use 5% as an example. There are some decisions to make: 1) You can take 5% of an account at the beginning of the year, and make that number your “salary,” and take that same amount each year. There are no increases for inflation. The downside to this is, of course, what about inflation? If you need $60,000 this year to live, you will need $61,800 next year to maintain the same lifestyle if inflation is 3%, and $80,000 in 10 years and $108,000 in 20 years. 2) You can take 5% of an account at the beginning of the first year and adjust that withdrawal amount each succeeding year for inflation. This is the model tested in the research recommending 4%. 3) You can take 5% of the portfolio each year, in which case the amount of the withdrawal will vary with the value of the portfolio. The downside here, of course, is that most of your expenses don’t vary with the stock market. If the market is down 20%, are you prepared to spend 20% less? on healthcare? So, you might say that approach #2 is the best, when combined with the 4%. However there is a huge downside to #2. While you can rest easy that your portfolio will last, the chances are that you will die with significant spare funds and will have, therefore, short-changed your lifestyle all those years. You could have been spending $80,000 per year, but only spent $70,000. If leaving an estate is a high priority, this may be appropriate, but what if it is not? You can arrive at the airport 4 hours before your flight and be certain that you will not miss your flight. But, who wants to retire in an airport? Contact us to find out which option might be best for you. |
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