Updated: May 3, 2013 12:14PM
Originally published: July 25, 2002
“Will you be able to retire?” scream the headlines. Good question. But how are you going to arrive at an answer with any degree of certainty?
In general, most people will have to work longer, save more and spend less before they retire because of the current bear market and lower expected returns in the future.
But what about your own personal situation?
Younger investors can use tools like Morningstar’s ClearFuture or FinancialEngines.com or Fidelity Portfolio Planner--all inexpensive or free online tools--to model investment outcomes based on changing assumptions of investment returns and strategies.
But if you’re about ready to retire, the need for personalized advice is particularly crucial. How should you invest your assets when you can no longer make future contributions to offset today’s losses? How much can you withdraw every year, without running out of money before you run out of life?
A mistake now could mean poverty later
Those are not hypothetical questions. Make a mistake and you could spend your final years in poverty. That’s the fear of every retiree. So let me introduce you, once again, to the only service I’ve found that inexpensively and authentically gives you personalized advice on those issues. It’s called the T. Rowe Price Retirement Income Manager (800-231-2838).
T. Rowe Price developed its unique computerized program to give retirees a high degree of confidence that they’re invested appropriately and are withdrawing money at a rate that will meet their retirement goals.
This unique service costs a one-time fee of $500. Although it’s expensive, I believe the results are well worth the cost. You’ll have to get involved in the process, filling out a detailed paper questionnaire that reveals your personal priorities. You’ll face issues such as: What’s more important, having a specific dollar amount each month, or certainty that you’ll never run out of money? Do you want to leave a balance of your assets to your children, or just make them last for your lifetime?
Your answers are fed into a computer model that uses sophisticated “Monte Carlo” modeling techniques to show you the degree of certainty of results of each alternative, based on investment and withdrawal variations.
The report will suggest specific investment portfolio alternatives. On the conservative side, that could mean putting a small portion of your retirement assets into an immediate, income-paying monthly annuity to cover basic needs. The annuity could be mixed with a variety of mutual funds ranging from money market funds to bond funds to an assortment of stock funds.
Want to know more? You can get a free, generic look at the service at www.troweprice.com/ric . An online Retirement Income Calculator will introduce you to the model, including variables that are modeled to create an investment and withdrawal scenario based on your needs, not average needs.
Don’t rely on ‘average’ advice or performance
Here’s why you should beware of average advice: A man retired in 1968 at age 65 with $250,000 in cash. His adviser suggested that he invest in a diversified portfolio of 60 percent stocks, 30 percent bonds and 10 percent money market. The adviser forecast that the return on this portfolio would be between 10 percent to 12 percent a year.
Based on that average rate of return, he could withdraw 8.5 percent of his principal each year without running out of cash for 30 years, until 1998, at which time he’d be age 95.
In hindsight, we can see that portfolio did indeed return an average of 11.7 percent between 1968 and 1998. But, here’s the danger in averages: There was a huge bear market in the early 1970s, resulting in very low returns in the early years. So, if the retiree had withdrawn 8.5 percent of his portfolio each year, he would have completely run out of money in 11 years!
Don’t avoid confronting the issue of retirement investments and withdrawals out of fear engendered by the current bear market. And don’t guess at what’s best. Based on recent experience, the odds are your guess will be wrong. And that’s The Savage Truth.
Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s Corp. and Pennzoil-Quaker State Co. Send questions via e-mail to email@example.com.