Safe with­drawal rate changes with times

Austin American-Statesman - - BUSINESSBRIEFING - Ques­tions about per­sonal fi­nance and in­vest­ments may be sent by e-mail to scott@scot­ Ques­tions of gen­eral in­ter­est will be an­swered in fu­ture col­umns.

There is no iron­clad rule for with­drawal rates. All the rules of thumb that you see dis­cussed are based on prob­a­bil­ity stud­ies of how long dif­fer­ent port­fo­lios will last at dif­fer­ent rates of with­drawal.

If you re­tire at age 65, the odds are with you for a with­drawal rate of 4 per­cent to 5 per­cent. If you are younger than that, or come from a long-lived fam­ily, you should make with­drawals at the low end of that range. If you are older than that or have a shorter-than-av­er­age life ex­pectancy, you can with­draw to­ward the higher end of the range.

An­other thing to re­mem­ber is that all these prob­a­bil­ity stud­ies were done in pe­ri­ods when in­ter­est rates and stock div­i­dend yields were con­sid­er­ably higher. For in­stance, the yield on a 50/50 port­fo­lio of S&P 500 in­dex stocks and five-year Trea­sury obli­ga­tions is un­der 2 per­cent to­day. In 2000 the same port­fo­lio pro­vided a yield of 3.65 per­cent, and in 1990 it pro­vided a yield of 5.99 per­cent. You can read more about this on my web­site un­der “port­fo­lio sur­vival.”

The dif­fer­ence in cur­rent yield is im­por­tant be­cause ev­ery dime of with­drawal that doesn’t come from cur­rent in­ter­est and div­i­dend in­come must come from prin­ci­pal. So in 1990 you could with­draw 6 per­cent and not touch your prin­ci­pal. If you did that to­day, you’d be tak­ing 4 per­cent of your prin­ci­pal each year. That’s a for­mula to go broke well be­fore you die.

This is a se­ri­ous prob­lem, one that I pointed out in an ear­lier col­umn about “Sol­vent Se­niors” and how low in­ter­est rates had chopped their in­vest­ment in­come. The cur­rent Fed­eral Re­serve in­ter­est rate pol­icy — which works to hold in­ter­est rates down — might en­cour­age home­own­er­ship and sup­port home prices, but it also works to dev­as­tate the re­tire­ment se­cu­rity of older peo­ple who have saved and in­vested. I call it the “Hood Robin” pol­icy, rob­bing savers to re­store big banks and main­tain egre­gious bonuses.

What is your opin­ion of the re­cent print ads run by at least one large, highly rated life in­surance com­pany fa­vor­ably com­par­ing the re­turns on its whole-life poli­cies with the S&P 500? Given the rel­a­tively fa­vor­able per­for­mance, what would you say to the idea of repo­si­tion­ing in­vest­ment as­sets so as to take ad­van­tage of this? Would your an­swer

I haven’t seen those ads, but it’s got to be a mis­lead­ing com­par­i­son. Yes, the S&P 500 has pro­vided no re­turn over the past 10 years. But if you look at longer pe­ri­ods — the kind of hold­ing pe­ri­ods you need to con­sider for buy­ing cash-value life in­surance — the re­turns will still be bet­ter than the re­turns on cash-value life.

At the end of 2009, for in­stance, the re­turn on the S&P 500 in­dex over 10 years was an an­nu­al­ized loss of 0.93 per­cent. Go out just five more years to 15 years, how­ever, and the an­nu­al­ized re­turn rises to 8 per­cent. At 20 years the re­turn rises a bit more, to 8.2 per­cent. And at 30 years it rises to an an­nu­al­ized rate of 11.2 per­cent.

Since the value of cash-value life poli­cies has to swim against the al­ways ris­ing cost of the ac­tual life in­surance, it is a rea­son­able bet that very few poli­cies would have grown cash val­ues at be­tween 8 per­cent and 11 per­cent an­nu­ally over the past 15 to 30 years.

Most peo­ple need to keep their life in­surance and in­vest­ing sep­a­rate be­cause they can grow their as­sets more quickly out­side a life pol­icy than in­side a life pol­icy. Equally im­por­tant, they won’t have need of a life pol­icy (and its ex­pense) when their sav­ings can re­place their la­bor earn­ing power.


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