Historically, withdrawing 5 percent or 6 percent each year from your retirement nest egg would have worked most of the time. Unfortunately, when this failed it often failed badly leaving folks with remaining years and no remaining cash. The financial advisors have tried to address this problem by solving for the worst possible case, but these low payout withdrawal strategies mean the most likely result will be that the retiree’s kids will have a lifelong party on their graves, and sadly, even the advisor’s worse case solution will fail to protect the retiree in all situations.

Instead of using a rigid plan that forces retirees to base their lives on the possible occurrence of an unlikely event, it makes more sense to base their lives on what is likely to happen, but have contingency plans to follow if the unlikely event occurs.

Try not to retire in a down period

It is New Year’s Day 2001, the year you planned to retire, but the market has dropped over 10 percent in the last six months. Perhaps we should delay retirement and wait and see. Using the S&P 500 as a proxy for the market, if we had $100,000 and took out an inflation-adjusted $4,000 a year beginning in 2001 we only had $74,108 left by the end of 2006, but if we had delayed retirement for two years we’d be sitting with $138,000 today.

Try to spend less in a down period

The retirement statistical models all assume that withdrawal amounts increase each year, but that may not reflect reality. I have listened to hundreds of retirees over the past score of years and in general I have found they try to match their outgo to their income. If the income reflects what is happening to the principal I have seen retirees adjust to the income, and a few years of taking a little less may put a detoured retirement engine back on track.

Is everyone able to postpone retirement or tighten their belt to get thru market downturns? Of course not, but many retirees can react to these challenges, and by reacting as people instead of computer models the retirees can help maintain their retirement funds.

Put 10 percent to 15 percent in a safe place

Beginning with $100,000 at the end of 1972, if you withdrew an inflation-adjusted $4500 from the S&P 500 starting in 1973 you ran out of money in 1993. However, if you put $90,000 in the S&P 500, placed the remaining $10,000 in a no-market-risk vehicle to produce the $4,500 withdrawals until it was used up, and then started taking inflation-adjusted $4,500 withdrawals from what was left of the original $90,000 in the S&P 500, you did not run out of money in 1993.

It appears putting 10 percent to 15 percent of the retirement money into no market risk vehicles, and withdrawing this money during market downturns, instead of tapping into the invested assets, helps our money survive longer.

Magical GLWB

The Guaranteed Lifetime Withdrawal Benefit available on many annuities gives us income for life and control of the asset. The main disadvantage is the payout is not indexed to inflation. However, most annuity GLWBs have reset or step-up provisions that allow for increased income if the benefit base increases. In addition, while most financial plans would suggest a 4 percent withdrawal starting point for a 70 year old the typical fixed annuity GLWB would pay out 6 percent. At 3 percent inflation the retiree would be age 85 before the financial plan income exceeded the GLWB income (and that assumes no increases in the GLWB benefit base and all of the excess GLWB income is spent on enjoying retirement and not reinvested). For retirees concerned about outliving their cash the best advice may be to ignore the retirement statistical probabilities, avoid the full market monte caused by total exposure to market risk, and take the retirement GLWB sure thing.

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