Page 105 - Forbes - USA (February 2018)

tween these extremes, between starva-
tion and volatility. The key to fi nding RETIREMENT: THE PAYOUT

it, Blanchett says, is to compartmental- WHAT CAN YOU PEEL OFF A $1 MILLION ACCOUNT? OUR SYSTEM HAS
ize your spending. Some spending, for YOU MOVING SLIVERS OF RISK ASSETS EVERY YEAR INTO A CASH BUCKET.
housing, medicine and food, is manda- BEGINNING WHEN THE BUCKET HAS ACCUMULATED FOUR YEARS OF SALES,

tory. The rest is discretionary. Cover YOU SPEND A FOURTH OF WHAT IT HOLDS AND THEN REPLENISH IT. THE BLUE
the first part with low-risk sources of LINE SHOWS A TYPICAL PAYOUT OVER 1927–2017, WHEN BALANCED FUNDS

income, he says. Cover the second with AVERAGED AN ANNUAL REAL RETURN OF 5%. THE RED LINE SHOWS A TYPICAL
DRAWDOWN IN A HYPOTHETICAL WORLD OF 3% RETURNS.
risk assets.
You have, potentially, four sources of
$100,000
low-risk income. Social Security is infl a-
tion-protected and, despite the system’s 90,000 Historical
funding shortfall, presumably reliable. A 80,000 Future?
married couple, both high earners and 70,000

both deferring benefits to age 70, can 60,000
pull down a combined $88,750 a year. CONSTANT DOLLARS 50,000
40,000
Next on the list of fi xed-income
generators is the old-style monthly pen- 30,000
20,000
sion, if you’re lucky enough to have one 10,000
of those.
0

Third on your list of potential sourc- 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

es of fixed income is a bond ladder. Buy YEAR OF RETIREMENT
a collection of Treasury bonds matur-
ing at annual intervals over the next 30 fast should you pull money out of the into cash.
years and you have a very predictable risk pile? Do your spending from the cash
flow of cash. For the ultimate peace of Needed: a system for spending that bucket. Beginning four years in, draw

mind you could make them infl ation- stretches those risk assets over a lifespan off a fourth of the bucket annually for
protected. A $1 million TIPS investment and also takes some of the edge off their high living. So if you want to retire at
buys approximately $36,000 a year in volatility. There are a lot of formulas that age 66, you’d start moving money out of

spending power for 30 years, aft er which do that, some rather complicated. Here’s the risk account at age 63.
there is nothing left . a method that is easy to follow. What kind of a payout pattern does
Last to be contemplated is a fi xed The starting point is a series of divi- this deliver? We applied the formula to

annuity. You plunk down, say, $100,000 sors published by the IRS as part of tax historical returns on a moderately risky
at age 66 and an insurance company rules requiring minimum distributions investment account to see what a typi-
vows to hand you $550 a month for as from a traditional IRA, beginning at age cal payout looked like (see chart). Th ere
long as you live. (That’s about what a 70 ½. Th e first number in the series is is uncertainty here—there’s no getting

male resident of New York would get.) 27.4. If you have $274,000 in risk assets, around that—but uncertainty is toler-

The 6.6% payout is high but not in- you’d liquidate $10,000, putting the cash able for discretionary spending.
dexed for infl ation. in a money market fund. At this point Blanchett jumps in with

There are a lot of reasons why retirees The IRS divisors descend a scale, at a the admonition that history paints too

aren’t in love with fixed annuities, in- rate a little slower than one notch with rosy a picture of what we can expect

cluding a lack of inflation protection and each passing year. Note: The IRS divi- from Wall Street now. He’s right. So we

a rotten return for the buyer who dies sors relate to life expectancies beginning added the red line. For that we did some
young. But annuitizing a portion of your at age 70, but you can borrow them to dice-throwing for 2018 to 2048 using
IRA, thereby making it an account you create a stretch-out plan that works fi ne greatly lowered expectations for stock
can’t outlive, does have this positive re- beginning in your 60s. and bond returns. The chart displays

sult, Blanchett says: It allows you to take The next number is 26.5. (For the the random payout that came closest to

more risk with the rest of your portfolio. full sequence, see forbes.com/RMD.) If matching the median result.
Let’s presume that, with or without
Cover your basic needs with safe
PETER AND MARIA HOEY FOR FORBES help from those unappetizing annui- liquidation grows 5% to $277,200, in the income, take a chance with the rest of
the risk money remaining after the fi rst

ties, you have your mandatory spend-
second year you sell off $277,200/26.5,
your assets, and sit tight through the
ing covered with stable income. Now
next crash. You don’t want to outlive
or $10,460. Again, the proceeds go into
your savings. But neither is it your
the money market bucket. Continue
you can venture the rest of your savings
in something riskier, perhaps a classic
objective to be the richest person in the
every year, moving an ever-larger frac-
60/40 blend of stocks and bonds. How

tion of what’s left of the risk account
cemetery. F
FEBRUARY 28, 2018 FORBES | 103