Tahoe-Truckee Market Beat: Securing sufficient retirement income
July 29, 2015
Deciding when you can afford retire can be a difficult decision. If you have a fixed pension from your employer it may not be so challenging. However, if you have your own 401K to manage that decision can require a lot of thought and planning.
You're going to have to estimate your life expectancy, health care costs and returns from your investment funds. Do you want to preserve your principal for beneficiaries or spend it down over your lifetime?
One simple solution is to save too much money. Say you want an income of $100,000 per year in retirement guaranteed for thirty years. All you would have to do today is have saved up $3.5 million and invest it all in 30-year U.S. Treasury bonds, which are yielding about 2.95 percent.
You'll receive just over $100,000 per year before taxes and get your initial investment returned in 30 years backed by the full faith and credit of the United States government.
One planning tool is known as the Trinity Study or the "4 percent rule". The way the 4 percent rule works is that you take 4 percent of your retirement account out in the first year of retirement and each year you add an inflation adjustment equal to the CPI.
They assumed that you held a traditional portfolio of 50 percent stocks and 50 percent bonds. The study found that if you followed the rule, historically you could receive that much income and not have to tap into your principal with about 95 percent certainty. The 4 percent rule could fail in times of high inflation and poor market returns.
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The 4 percent rule is actually more of a guideline. You may want to consider other higher income strategies than a 50/50 stock bond mix. Or you may be in a situation where you want to spend down your principal.
An option that some retirees choose is to do some part time or seasonal work in retirement. I have several local friends who are retired and work part time at the ski resorts in the winter and at the golf courses in the summer months. They enjoy what they are doing, earn some extra income and also get ski and golf benefits.
An associate of mine, Art Koff, has a website called retiredbrains.com that has a section devoted to retirees who want to keep doing some part time work.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.