Retirement Strategies

by Robert Sheard
(TMF Sheard)

LEXINGTON, KY. (July 22, 1998) -- A growing number of our readers are rightfully concerned with investment strategies and portfolio management techniques for retirees. Today, then, I want to lay out a simple plan you may find useful in developing your own techniques.

First, how much does it take to retire? My simple rule isn't based on age or your pre-retirement salary, but rather it's a simple function of what you need to pull out of your portfolio each year. For example, let's say you determine that you need $40,000 a year in today's dollars. (We'll get to inflation later). From this amount, subtract any sources of income you'll have outside of your portfolio profits. So if you have a social security check coming, or a pension from your former employment, or whatever, deduct that from your annual spending need. Let's say that you really only need $30,000 from your portfolio for the coming year's spending requirements.

To calculate how big your portfolio needs to be, multiply that final spending requirement ($30,000 in my example) by twenty. Your portfolio, in this case, should be at least $600,000 to retire comfortably and produce your required income. I pulled the "20 Rule" from a variety of sources. Most ongoing foundations have a rule similar to this, where they pay out in charitable payments no more than 5% to 7% of their assets in any one year. This allows them to continue growing their portfolios to stay ahead of inflation and still maintain growth in their payouts each year.

By only withdrawing 5% of your portfolio (or even less if you're fortunate), you can sustain the kind of hit a bear market might bring to your portfolio without altering your ability to meet your spending needs. And with today's retired investor living on the proceeds of his or her portfolio for twenty, thirty, even forty years, it's important that your plan can sustain your spending needs indefinitely. Also, the returns one can reasonably expect (15% or so after taxes) will keep you ahead of both your spending needs and inflation.

Now to the nuts and bolts. What I usually recommend is using stock strategies that rotate annually (Dow Approaches and Keystone come to mind). That way you can pull out the following year's spending money at the same time you update your portfolio. For example, starting with $600,000, you'd pull out the $30,000 you need for the coming year and invest the rest. Assuming an after-tax return of 15%, your portfolio would grow to $655,500.

The next year, you'd again pull out the expenses for the coming year, let's say $31,000 to adjust for inflation. The remaining $624,500 would be invested for another year, growing to $718,175. And so on, indefinitely. Of course, your returns won't be so constant. Some years, you'll make considerably more than 15%; some years you'll lose money. But by limiting your withdrawals to 5% of your total portfolio (or less), you have the cushion you need to sustain your spending needs.

What you should do with the money you withdraw each year is up to you and how complicated you want to make things. The easiest way is to dump the whole annual amount into a money market checking account so it's immediately available as you need it. Or if you want to juice the little bit of returns available in a cash-like investment, you might buy a sequence of certificates of deposit for the year with varying maturity periods, so that a portion of that year's money comes available throughout the year.

Whatever plan you adopt, there's no reason for the retired investor to get Wise and flock towards fixed-income securities. By managing your portfolio with great long-term strategies, you can (and should) stay invested in stocks and be able to live comfortably off of your portfolio growth indefinitely.

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[Robert Sheard is the author of the The Unemotional Investor (Simon & Schuster, 1998) available now at Amazon.com and your local bookseller.]