By: Colby Kirkland
In class, we have discussed the
significance of building wealth, limiting your expenses, and
increasing your savings. I came across an article by Walter
Updegrave on CNN’s website that talks about managing your
retirement savings and making it last into your 90’s. The way you
divide your money between stocks and bonds is a crucial factor in
determining how long your savings will last in retirement, but an
even more important factor is the amount that you withdraw from your
retirement portfolio each year.
Based on a retirement income
calculator, a 65-year-old retiree who has $500,000 in savings and
starts with a 4% initial withdrawal that he increases each year for
inflation- $20,000 the first year, $20,500 the second, etc., assuming
2.5% annual inflation- an allocation with 20% or more in stocks will
provide a 75% to 80% chance that his savings will last 30 or more
years. An equal 50-50 stocks-bonds mix would yield the highest
probability in this scenario because the higher level of risk and
volatility that results from greater stock exposure can eventually
damage your portfolio.
Higher stock allocations have more
upside potential. Although a 50-50 stocks-bonds mix has better
chance of lasting 30 years than a 90-10 mix at a 4% withdrawal rate,
the 90-10 mix could generate much more money if the stock market
produces high returns. The most important thing to note, however, is
that the lower the withdrawal rate, the more freedom you have to
choose an allocation that fits your tolerance of risk.
If you have a low tolerance risk, then
you can increase the percentage of your portfolio that goes into
bonds, but if you are more of a risk taker, then you can gravitate
more to stocks.
By limiting the amount of withdrawals, the
probability of your portfolio lasting is increased, no matter what
allocation you choose.
Due to the uncertainty present in the
economy and financial markets, it is probably wise to lean more on
the conservative side when deciding how much to withdraw and how to
invest. It may also be a good idea to invest a portion of your
savings in an immediate annuity that can provide lifetime income
regardless of how your investments perform.
Source:
Great article Colby! With the aformetioned information presented, I want to know things I can do now as a 20 year old budding professional to begin saving for my retirement. Should I start saving money from my internships and put it in a retirement account? Are there accounts that I can take advantage of? I ask these questions because I refuse to be living "rich" at 65...I want to be wealthy!
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