The Golden Goose Retirement Income Plan

You’re counting on your retirement plan to be your golden goose; the question is how many eggs can you take without killing the goose? A recent study shows most upcoming retirees have little idea how much money they can safely withdraw.

The latest research provides an answer and set of clear cut rules to follow to give you the greatest probability for success. What happens if you follow the rules? You may be able to withdraw as much as 6 – 8% of your initial portfolio value, or $6,000 - $8,000 per year for every $100,000 you have invested.

So what are these rules?

First, you must use a multi-asset class portfolio. This means you have funds invested in cash, fixed income, U.S. large cap value, U.S. large cap growth, U.S. small cap value, U.S. small cap growth, real estate and international asset classes.

Second, your portfolio must have a minimum equity exposure of 50% and a maximum equity exposure of 80%.

Third, when you take withdrawals your income must come from the following sources in descending order:

• Cash from rebalancing over-weighted equities
• Cash from rebalancing over-weighted fixed income
• Withdrawals from remaining cash
• Withdrawals from remaining fixed income
• Withdrawals from remaining equities to be taken from the top performing funds or asset classes first.
• No withdrawals from equity classes with negative returns if cash or fixed income are sufficient

Fourth, although the rules typically allow you a raise to keep pace with inflation, to protect your portfolio from eroding you must follow a two part capital preservation rule. The first part of this rule simply says you don’t get a raise after a year with a negative total return.

The second part of the rule is a little more complex. It is triggered when your current withdrawal rate would be 20% greater than your initial withdrawal rate. If this occurs you must reduce your current year’s withdrawal by 10%. (Example: You start withdrawing 8% ($8,000 per $100,000). The market goes down for several years and your portfolio value is now at $83,000. The same $8,000 withdrawal is now 9.6% of the current portfolio value, a rate which is 20% greater than your initial withdrawal rate.)

The fifth and final rule is most people’s favorite. Exactly the opposite of the capital preservation rule, it is called the prosperity rule. It says that as long as the portfolio did not have a negative return in the prior year you may increase your withdrawal in the amount of the CPI (consumer price index).

Following these rules takes discipline. If you don’t follow the rules, however, you may be killing your own golden goose. If you are not comfortable applying the rules yourself, consider seeking the services of a qualified fee-only financial advisor who is familiar with this latest research study.

(Study results published in the March 2006 issue of Journal of Financial Planning by Jonathan T. Guyton and William J. Klinger.)