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November 02, 2010 at 08:00 PM
An advisor correctly pointed out if one buys an immediate annuity at age 65, and inflation averages 3 percent, the after-inflation income would be cut by 45 percent by age 85. But then he dismissed inflation-adjusting annuities because the initial payouts are lower than if they don’t adjust for inflation. So what’s his solution? Wall Street’s old stated-withdrawal percentage method.
There are two problems with this. First, the reality of all Wall Street stated-withdrawal percentage plans is there is a probability the plan will fail, the assets will be spent to zero, and the income will stop before death. If the disease in retirement is running out of money, the annuity cures the disease while the Wall Street approach treats it as a chronic illness without a cure.
Second, the typical Wall Street plan says if you have $100,000 in a securities portfolio at age 65, you can take out $4,000 a year initially, and if inflation averages 3 percent, the plan would hopefully produce the $7,224 needed at age 85 to keep you even with inflation.
