Retire with more money and less risk

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By Paul Merriman

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Some people enter retirement with a great financial blessing: More than "just enough" resources to meet their needs.

Compared with those who retire with just enough, these people:

• have more ability to weather the storms of bear markets;
  
• can sleep better because they don't need to take so much investment risk;
  
• can deal with financial emergencies and take advantage of opportunities;
  
• can plan to "live it up" a bit more in retirement; and
  
• be confident that they won't run out of money and in fact will likely leave some resources to their heirs.

It's a pretty picture, one I think is especially important for two groups of investors: retirees who have ample resources (to show how they can make the most of their situations), and pre-retirees (to show why this state of financial affairs is worth achieving before they retire).

The following discussion is centered around distributions, the regular portfolio withdrawals that often make up the bulk of the cash flow that retirees use to support their living standards.

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Because the greatest financial risk most retirees face is running out of money, they need to be prudent about how much they spend. One time-honored formula for relatively prudent spending is to withdraw 4% or 5% of your portfolio each year. 

The question is: What do you take out after your first year of retirement?

As I described in my article last week, retirees with just enough money to meet their needs can adjust each subsequent withdrawal upward to reflect inflation. 

That will assure them a relatively constant inflation-adjusted income. But as I described in that article, they will pay for that "certainty" about future withdrawals by taking more risk than they might like. 

On the other hand, retirees who have saved what I think of as "more than enough" may be able to take a different course, basing their future withdrawals not on inflation but on the growth of their portfolio

.

That's all sort of esoteric. Let's get more concrete.

Imagine that you have saved enough money that you can more than meet your cost of living by taking out 5% a year. For the sake of easy numbers, let's assume your portfolio is worth $1 million and you can get by with room to spare if you take $50,000 from it in the first year of retirement. That's a withdrawal rate of 5%. 

Because of that "room to spare" in your budget, you know you can get by with less if necessary. If this describes you, then you are a prime candidate for what I call flexible withdrawals.

The plan I'm about to show you is one that I have sometimes described as the ultimate retirement luxury. To see why, look at a table of numbers that contains five columns showing year-by-year portfolio values and distributions. (These are hypothetical numbers but based on real returns and real inflation.)