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Wednesday, March 25, 2009

Withdrawal Strategies for Retirement Portfolios

We often get questions from people who are approaching or in retirement who need help managing their portfolios to fund their retirement needs. A sample of these questions include:

• How much of my portfolio should I withdraw every year to fund my retirement needs?

• What is considered a “safe” withdrawal strategy, taking into account the potential for significant equity market declines (such as the 1973-1974, or 2000-2002 bear market) or periods of high inflation?

• I want to withdraw a certain percentage of my portfolio every year. What should be my portfolio’s allocation to equities or other growth assets, such as REITs?

First, subscribers should adopt a “total portfolio approach” when determining an appropriate withdrawal percentage from a retirement portfolio. In other words, not only should one take into account all other current income sources (such as Social Security or annuity payments from a defined benefits retirement plan) and expense needs, but projected income sources and expense needs as well, such as:

• The impact of inflation on the purchasing power of existing annuity income, as unlike Social Security
payments, there is usually no cost-of-living adjustments for regular annuity payments.

• An increased spending on goods and services that are typically “consumed” by retirees. Examples include health care expenses, vacation and holiday expenses, or even financial responsibility for an elderly parent (which is increasingly common since many folks are now living into their 90s).

• A “shock event,” such as a 50% decline in the global equity markets or the destruction of your primary residence due to a natural disaster.

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