| Sargent & Lundy Savings Investment Plan |
| MAKING YOUR MONEY LAST |
| The following excerpts are from an article in the October
1998 issue of "Retire With Money". The opinions of the author,
Vanessa Richardson, may or may not reflect those of the SIP Committee.
Every retiree must answer this question: How much money can I withdraw annually from my investment portfolio to live comfortably but never run out of money? For decades financial advisers gave clients a standard rule of thumb: If you take 3% annually - including dividends and interest income - from a balanced portfolio of stocks and bonds, your stash will never run dry. But with the stock market still high and inflation at a 12-year low, can you safely take out more? Yes, say many financial experts, especially if you have a stock-dominated portfolio. "With today's sound economy, many retirees who want their money to last as long as they do can safely consider withdrawal rates of 5% to 7%," says New York City financial planner Joel Isaacson. "Retirees who want to leave an estate for their heirs can stick with a 3% to 4% withdrawal rate." To decide how deeply you can dip into your savings, here's what to do: * Draft a budget before you start spending. First, figure out how much you'll need for monthly living expenses in retirement. Keep in mind that mortgage payments and commuting costs will likely drop - but outlays for travel, hobbies and household utilities will probably rise. If your projected expenses exceed your projected income, you'll need to decide where to cut back. * Keep an eye on inflation. Financial planners generally project a 3% annual rate of inflation - which is conservative even though over the past 12 months inflation rose only 1.7%. At 3%, a dollar's purchasing power will be halved in 25 years - but fortunately most diversified investment portfolios are currently outpacing inflation. Explains money manager Michael Scarborough in Annapolis, Md.: "Your portfolio will keep pace with 3% annual inflation as long as you earn at least 8% a year and withdraw no more than 5% a year." * Aim for a 60/40 mix of stocks and bonds in your portfolio for at least the first 10 years of your retirement. Don't cut back sharply on equities when you retire. While bond-heavy portfolios tend to be less volatile and provide steady income, they may not keep up with the rising cost of living. On the other hand, says Isaacson: "Some people have been spoiled by the returns of the past few years and now have as much as 75% of their portfolio in stocks." He tells retired clients to hold 60% of their portfolio in growth stocks and 40% in U.S. Treasuries, corporate or municipal bonds. That mix will allow you to benefit from the market's gains, while providing a cushion for market drops. * Withdraw from your taxable accounts first. The reason: You'll owe ordinary income tax, as high as 39.6%, on IRA withdrawals but no more than 20% on capital gains from the sale of non-deferred investments that you've held for more than 12 months. Scarborough recommends that you start by liquidating mutual funds. "If you've been reinvesting a fund's dividends and capital-gains distributions, you've already paid taxes on them," he says. "So your unrealized gains in a fund are likely to be smaller than on stocks whose capital gains have been entirely tax deferred." Other candidates for early liquidation: fixed-income securities with low taxable yields and stocks that don't pay dividends. * Check your figures periodically during retirement. Warns Isaacson: "In the first years of retirement, expenses usually vary greatly from what retirees expected." You may have to cut back on spending - or you might discover that you can live more lavishly than you'd planned. |
This page updated on 9/10/98