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Accumulation vs. Distribution

Saving for retirement is the easy part. In many ways, managing your investments so that you don't run out of money is trickier than saving it in the first place. People don't think about the risk of outliving their money, but they should put as much effort into trying to make wealth last as they did to building that wealth in the first place. Possibly the biggest challenge of your retirement planning is to take the money you've amassed over your life to this point and turn it into a reliable income stream to support a post-work life that could last as long as or maybe even longer than your work life.

However you do it, it's crucial that you enter retirement with some sort of plan for estimating how much income you'll need from your savings and how you intend to get it. While amassing a retirement nest egg can make you feel like you completed a long journey, the real trip starts when you begin tapping that nest egg.

Unfortunately, not every investor is going to be able to retire with a portfolio that can provide sufficient income to meet their current and future needs. In addition to Social Security and any pension or retirement income, the investor will likely need to draw upon principal from their investment portfolio, in addition to using the interest, dividend, and capital gains income it generates, to meet expenses. We advocate a total return approach to the portfolio and are indifferent as to whether cash flow comes from capital appreciation, dividends, income or other sources. The factors weighing into whether or not the investor's assets will likely be sufficient are many, and the effects of both inflation and less-than-expected investment returns can dramatically impact the retirement plan. Various well known studies indicate that a "safe" withdrawal rate falls in the 3.0% to 5.0% range. Harvard University did a study to determine how much could be safely withdrawn from their endowment fund without depleting the principal. Assuming a portfolio of 50% stocks and 50% bonds and cash, Harvard's analysts calculated that 4% could be withdrawn the first year and then adjust the subsequent year's withdrawals for inflation. For example, if there was 5% inflation, the second year's withdrawal would be 4.2% (4% x 1.05) on the initial asset value. A 5% rate is considered to be at the outer limit of acceptable levels of withdrawals. This would require holding 80 to 100% of the portfolio in stocks, a level few retirees would find comfortable. These studies were based on historical data, and future results will vary and will impact these estimated "safe withdrawal rates."


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