FAQ-Frequently Asked Questions
1. How much can I withdraw from my assets per year?
Answer: For a 60-65 year old retiree the general guideline is 4-5% per year for portfolio of 60:40 Stocks:Bonds. For somebody with an expected longevity of only 10 years, he would clearly be able to withdraw higher percentages. But you must just keep in mind that for a 65 year old couple there is a 46% probability that one of them will live to age 95. For more details see Withdrawal Strategies in Retirement.
Answer: For a 60-65 year old retiree the general guideline is 4-5% per year for portfolio of 60:40 Stocks:Bonds. For somebody with an expected longevity of only 10 years, he would clearly be able to withdraw higher percentages. But you must just keep in mind that for a 65 year old couple there is a 46% probability that one of them will live to age 95. For more details see Withdrawal Strategies in Retirement.
2. When to start saving? How much do I need to save per year?
Answer: Start saving as soon as you have income (i.e. start working). Assuming that you plan to retire at age at age 65 (later than most have been retiring recently) and would like to have 100% of your pre-retirement income (that’s more than typical retiree needs given that no further saving is required and expenses may be lower in some areas), then assuming a 2% real increase in income during working years you must save 15%/year if you start saving at age 25 and that required savings rate increases by 1%/year for each year that you delay start of saving until age 35, when you’d need to save 25%. Any further delay would require savings rates increasing at 2%/year. For more details see the When to Start Saving? How Much Do I Need to Save? section of Planning
Answer: Start saving as soon as you have income (i.e. start working). Assuming that you plan to retire at age at age 65 (later than most have been retiring recently) and would like to have 100% of your pre-retirement income (that’s more than typical retiree needs given that no further saving is required and expenses may be lower in some areas), then assuming a 2% real increase in income during working years you must save 15%/year if you start saving at age 25 and that required savings rate increases by 1%/year for each year that you delay start of saving until age 35, when you’d need to save 25%. Any further delay would require savings rates increasing at 2%/year. For more details see the When to Start Saving? How Much Do I Need to Save? section of Planning
3. How much assets do I need for retirement?
Answer: If you withdraw from your portfolio at 4% per year and you want to withdraw $50,000/yr then you need 50,000/(0.04)= $1,250,000; $100,000/yr would require 100,000/(0.04)= $2,500,000. The amount that you’d need to draw is a function of your overall annual needs, less other sources of income. For more details see the How Much Do I Need to Retire section of Planning 4. What is the required savings rate to achieve my retirement goal?
Answer: See answer to #2.
Answer: If you withdraw from your portfolio at 4% per year and you want to withdraw $50,000/yr then you need 50,000/(0.04)= $1,250,000; $100,000/yr would require 100,000/(0.04)= $2,500,000. The amount that you’d need to draw is a function of your overall annual needs, less other sources of income. For more details see the How Much Do I Need to Retire section of Planning 4. What is the required savings rate to achieve my retirement goal?
Answer: See answer to #2.
5. What are your portfolio return requirements per year?
Answer: Simply put each tear you must earn what you take out, plus the inflation during the past year, in order to maintain future spending power. So for 4.5% withdrawal rate and 3% inflation you must earn 7.5% return. For more details see Asset Allocation
Answer: Simply put each tear you must earn what you take out, plus the inflation during the past year, in order to maintain future spending power. So for 4.5% withdrawal rate and 3% inflation you must earn 7.5% return. For more details see Asset Allocation
6. What’s my risk of running out of money?
Answer: That depends on your age, withdrawal rate from the assets, the asset mix, your expected longevity (see answer to question #7) and the risk of some very poor returns early in retirement. Generally speaking most advisors using a portfolio with a 60:40 mix of stocks:bonds and an indexed 4% annual withdrawal rate feel that the probability of running out of money is acceptable. Remember that a, not far fetched, 50% drop in value of equities during the first 2-3 years of retirement, reduce your overall nest egg to 70% of what you started with. I prefer to think of annual 4-5% withdrawal based on last year-end portfolio value. This make the income more volatile but insures that you never run out of money.
Answer: That depends on your age, withdrawal rate from the assets, the asset mix, your expected longevity (see answer to question #7) and the risk of some very poor returns early in retirement. Generally speaking most advisors using a portfolio with a 60:40 mix of stocks:bonds and an indexed 4% annual withdrawal rate feel that the probability of running out of money is acceptable. Remember that a, not far fetched, 50% drop in value of equities during the first 2-3 years of retirement, reduce your overall nest egg to 70% of what you started with. I prefer to think of annual 4-5% withdrawal based on last year-end portfolio value. This make the income more volatile but insures that you never run out of money.
7. What’s Longevity Risk? Can I Insure Against It?
Answer: TIAA-CREF Institute’s statistics indicate that life expectancy at birth is 74 and 80 for males and females, respectively. At age 65, the male and female life expectancies are about 81 and 85, respectively. And of course you must remember that according to the definition of life expectancy, half the individuals will live longer than the expectancy age; so a 65 year old male and female has a 22% and 31% probability, respectively, of living to age 95. For a 65 year old couple, there is a 45% probability of one of them reaching age 95! Immediate annuities offer some level guaranteed income for life (but are very expensive and don’t usually offer reasonable cost inflation protection). Delayed payout annuities without any bells-and-whistles are emerging as a credible longevity insurance product, but it will be a few years before there is adequate competition to insure competitive rates. For more details see Longevity Insurance
Answer: TIAA-CREF Institute’s statistics indicate that life expectancy at birth is 74 and 80 for males and females, respectively. At age 65, the male and female life expectancies are about 81 and 85, respectively. And of course you must remember that according to the definition of life expectancy, half the individuals will live longer than the expectancy age; so a 65 year old male and female has a 22% and 31% probability, respectively, of living to age 95. For a 65 year old couple, there is a 45% probability of one of them reaching age 95! Immediate annuities offer some level guaranteed income for life (but are very expensive and don’t usually offer reasonable cost inflation protection). Delayed payout annuities without any bells-and-whistles are emerging as a credible longevity insurance product, but it will be a few years before there is adequate competition to insure competitive rates. For more details see Longevity Insurance
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