Keep The Money Flowing
It's okay to dig deep -- but not too deep -- into your retirement stash.
By Mary Beth Franklin, Senior Editor
From Kiplinger's Personal Finance magazine, October 2004
Advertisement
The real world
Most retirees are more concerned about maintaining their standard of living in retirement than figuring out a formula for doing so. "No one has ever come to me and asked how much of their assets they can afford to spend," says Peter Winer, a financial planner near Baltimore who works exclusively with retirees. "I try to create the income they are looking for while making sure they don't run out of money."
One of his clients, Richard Sunderland, 68, of Brooklandville, Md., wanted $5,000 a month from his investments to supplement his $1,500 monthly social security benefit and the income from his part-time consulting job. A former small-business owner without a traditional pension, Sunderland hoped to replace about 90% of his previous after-tax income because his expenses have remained virtually the same since he stopped working in October 2002. Although he no longer drives to the office each day, Sunderland puts just as many miles on his car, making weekly trips to Pennsylvania. There he volunteers for Animal Rescue, walking dogs and writing thank-you notes for donations. He also serves as treasurer of his church and is active in the local Rotary club.
Applying the 4% rule to Sunderland's nearly $1-million portfolio would have produced just $40,000 a year -- 50% less than he needed. Winer found a way to fill the gap. He used $400,000 to buy an annuity that guarantees $60,000 a year of income for ten years. Then he invested the balance of Sunderland's assets in stocks. Although a 100% stock portfolio would normally be considered aggressive for a 68-year-old, it really amounts to only 55% of Sunderland's assets, with the annuity mimicking a bond portfolio.
"He can spend his safe money over the next ten years while the remaining investments could grow back to the nearly $1 million he started with," says Winer. "It's a creative way to give clients the income they need while insulating them from the market."
Sunderland prefers Winer's philosophy over that of his previous adviser, who warned that he might run out of money in his eighties if he withdrew more than the recommended percentage each year. "It was a little gray cloud over my head," says Sunderland. "When Pete came along with his ideas about income and investments, it just made sense."