The Number by Lee Eisenberg

Author:Lee Eisenberg
Language: eng
Format: epub
Publisher: Free Press
Published: 2006-10-06T04:00:00+00:00

Withdrawal Symptoms

When Tom Jr. stayed up nights back in Chicago, running and rerunning assumptions on whether he could move to the desert, he wasn’t just burning the midnight oil, he was burning his candle at both ends. He was counting on too much income from investments and part-time work and not being strict enough on the expense side. Avoiding the first set of delusions would seem straightforward enough: use assumptions about market returns and outside income that are conservative, at least well tempered. But how do you know what you might reasonably spend based on those sensible income projections?

Your retirement picture so far: You’re going to live to whatever age you’re going to live to. Your asset allocation is properly diversified, and your expectation of what those holdings will return is reasonable, even a bit cautious. Your health care costs are contained. Inflation, even though you had nothing to do with it one way or the other, is in check.

The only puzzle piece remaining is how much you think you can draw down from your assets to pay for things you deem to be necessary or, just to live a little, nice: help your grandson through college, cruise the Greek islands, customize a golf cart, dinner and a movie every Saturday night. If you draw down your Number too much, too soon, you’re in trouble. If you draw it down too little, too late, you’re not in trouble but you’ll miss out on life’s dwindling opportunities to squeeze out some fun and satisfaction. So how do you know how much drawdown is too much, how little is too little?

These questions are nowhere near as fiendishly complicated as they sound. In fact, drawdown is one topic about which there is little disagreement, at least for those with okay assets on account. Assuming that these assets are more or less rationally allocated, which is to say you’ve got anywhere from half to three-quarters of your money in stocks, the rest in bonds, then the magic-number withdrawal rate is 4 percent of the value of your assets per year.

Four percent. That’s what it says in a guide to lifetime income planning published by a big financial services firm.

Four percent. That’s what I hear from a money manager with clients whose invested assets start at $20 million and go as high as Pluto.

Four percent. That’s what they say time and again at a four-day conference hosted by the leading association of independent financial planners.

Four percent. Four percent is the reliable drawdown number if you want your assets to wind up somewhere north of zero when Final Accounting time rolls around.

But it wasn’t always 4 percent. It used to be higher. Through the 1980s and ’90s, financial advisers and money magazines touted generous withdrawal numbers of 7 percent, 8 percent, 9 percent, 10 percent. Many retirees withdrew and spent accordingly. But—oops!—the financial advisers and magazines had overlooked the you-would-think-it-was-obvious fact that stock market returns through that era were unusually robust. What almost everybody assumed was

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