The Anna Maria Island Sun Newspaper


Vol. 16 No. 14 - February 3, 2016

BUSINESS

Anna Maria Island Sun News Story

Retirement planning

Investment Corner

In retirement planning today, researchers and investors typically consider the accumulation and distribution phases separately. Much of modern retirement planning depends on what is known as the distribution rate in retirement, which is the percentage of your assets withdrawn as income each year. This rate is important to compute how much wealth you need to accumulate before you retire. Once you know how much you need to save in total, it is possible to work backwards and determine the approximate savings rate you’ll need during your accumulation phase. This rate is often known as the safe savings rate.

RETHINKING RETIREMENT PLANNING

You’ve likely heard of the 4 percent rule, which serves as a guideline for a sustainable rate of spending during a 30-year retirement. However, rather than isolating the accumulation and distribution phases, what if you were to link these two phases together and view them as an integrated whole. Targeting a savings rate during your working years and associating it with a planned distribution rate in retirement may create the most comprehensive plan. The first step is to estimate the withdrawals you’ll need to pay for your planned retirement expenses after taking all retirement income sources, including Social Security, into consideration.

SOLVING FOR X

Let’s say you make $100,000 today and want to withdraw an inflation-adjusted 50 percent of your salary from your portfolio (a 60/40 mix of stocks and bonds) each year for a 30-year retirement. Your goal is to figure out the savings rate that will allow you to finance your anticipated retirement expenses. Adhering to that savings rate throughout your career should help you meet your expected retirement expenses, regardless of the withdrawal rate you use when planning.

Your required savings and withdrawal rates depend heavily on the return of your investments. If we review data between 1926 and today, there has been a lot of volatility in the maximum withdrawal rates that are sustainable, ranging between 4 to 10 percent depending on the returns offered in the markets after you retire. We can also calculate sustainable savings rates based on the market cycle, with the results ranging from 10 to 38 percent.

Over time an average savings rate of 16 percent provides a high probability of success. In other words, saving 16 percent of your income during a working lifetime will help you accumulate enough capital so that when the 4 percent rule is applied in retirement you will have a similar lifestyle to your pre-retirement years.

IS THIS THE RIGHT AMOUNT FOR ME?

There is no guaranteed way to accurately forecast your retirement needs, as you can’t know for sure what the future holds, what your circumstances will be down the road and how many years your retirement will be. However, historical data and research can provide a strong benchmark to follow. Aiming to save 16 percent of your annual salary is a great place to start if you’re early in your career and just getting started with your retirement planning.

WHAT TO DO NEXT

As always, having a plan in place for retirement savings and other goals is a great idea. For many, working with a qualified financial professional to determine an appropriate savings and withdrawal rate that aligns with your specific situation and goals is a good idea.

Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.

 


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