How Much Do You Need to Retire?

With the markets progressing downwards, alot of people are wondering what income they can generate from their savings or how long their income will last given the size of their retirement savings and inflation.

I was reading an article on an advisor website called horsemouth.com today discussing past and current studies on the subject. William T. Bengen published a study in 1994 that outlined a 4% withdrawal rate with a minimum 50% investment in stocks indexed to inflation would be able to last a persons lifetime.

A $1 million portfolio, therefore, would generate $40,000 per year indexed to inflation. Couple that with government pension plans and you have an idea of what a realistic annual income should be to last a lifetime.

William F. Sharpe, a nobel prize winner who has written many books on financial analysis, challenged this study. He suggested investing in stripped bonds or zero-coupon bonds which are just compound interest bonds. The amount that you would buy to mature each year would be slightly higher each year to account for inflation. By investing in this fashion, you would guarantee your income stream regardless of market events. This study calculated the withdrawal rate at 4.46% vs. the 4% previously mentioned. The flaw however was that the bonds would last for 30 years and then an individuals funds would be exhausted.

So what are some of the alternatives? We have been running a series of ads on radio of which one discusses living past 100 and what problems that will pose for retirees. There are investment solutions such as indexed annuities coupled with long-term care insurance or guaranteed minimum withdrawal programs such as the Manulife Income Plus program to ensure that you have income for life.

The Manulife program provides a 5% withdrawal rate guaranteed for life if you are over 65 with the possibility of higher income if the underlying portfolio goes up in value over time.

This exceeds the rate published in the studies mentioned above along with some lifetime guarantees. More information on these programs is available on our site by clicking the link below.

http://rothenbergcapitalmanagement.com/index.php?id=190

What are your thoughts on the studies mentioned above along with the possible solutions?

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2 Responses

  1. Responding to “How much do you need to retire?”

    I have looked carefully at these types of plans. It seems to me that the “cost” in the form of both fees to the insurance company annually and the higher cost of the “MER” erode the guarantted 5% quite substantially.. Is the investor just paying the “cost” as insurance against a market downturn when they have to retire? Is this “cost” reasonable or can the same result be achieved in other ways?

  2. Hi Abe,

    Thank you for your comments on this particular post. There are fees associated with these products launched by insurance companies above those of your typical mutual fund. Along with the death benefit guarantee, the insurance companies are taking additional risk by guaranteeing the income for life if you are over 65 and giving investors the ability to reset the capital every 3 years if the value is higher which in turn leads to higher monthly payments.

    The cost associated with providing the guarantee ranges from .25% to .75% per year depending on the equity component in the portfolio as per the article that you can link to below.

    http://www.morningstar.ca/globalhome/industry/news.asp?articleid=ArticleID1114200613231

    The 5% guarantee payout is net of fees so fees do not reduce the 5% payout. Alternatively, you could look at the BMO Dynamic Retirement Edge Portfolios. I have provided a link to this as well. The fees on this product are less than the insurance based products.

    http://rothenbergcapitalmanagement.com/index.php?id=191

    At the end of the day, it becomes a personal choice as to whether the added fees are worth the peace of mind just as buying life insurance provides peace of mind but there is a cost to get it.

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