Planning For Retirement - Withdrawal Rates

Q. Jeff, I am thinking of early retirement and am concerned what would happen to my retirement money and 401k. I will be 55 and my wife is 53. My company pension is $315K and my 401k is at $70K. I have been going to Merrill Lynch for advice and would like your opinion. What could this amount draw for me and still grow without running out. I can be conservative and my wife will start teaching again as she had stopped to care for grandkids. She will work for 7 more years until she can qualify for her retirement at 60 years of age. Thanks Gerry

A. Let me congratulate you first for taking the time to get a second opinion, and second, for researching your financial options prior to making the decision to retire. When it comes to dealing with financial 'professional' it is good to have a healthy dose of skepticism!

Typically, you want to look at a withdrawal rate of between 4% and 5% per year. The idea is that the account will average more than that (maybe 6-7%) and since the principal increases over time, so will the amount you are taking out. In your case, that means withdrawals between $15k and $19k. If anyone is telling you that you can do more than that without tapping your principle watch out. It's easy to promise and hard to deliver, especially in today's environment.

That being said, I have a client that transferred $430k to me in 11/02 and has been taking out $36k per year. That's about an 8% withdrawal rate on his original investment. Even though he has now taken out close to $75k, his account is worth over $480k.

I have another client who moved over $100k around the same time and has had to take out $25k per year since then. Even after taking out around $45k, his account is still worth $75k.

These are exceptional results, and if I were you, I wouldn't want to base my retirement on achieving similar results. If you can't make it on 4-5% then you should consider reducing your living expenses or working longer. Your willingness to spend down principal could affect this calculation a little, but will increase your long-term risk.

Additionally, other factors to consider when making your decision to retire should be health insurance. If you wife has already obtained a position that will provide insurance then you are taken care of.

I hope this helps. I can provide specific recommendations should you decide to retire on how best to invest and manage the money. I can also provide specific comments on Merrill's recommendations.

You should keep in mind that when choosing a financial advisor, you are making one of the most important decisions of your financial life. Your selection can mean the difference between being forced to go back to work and living out the comfortable retirement you've always dreamed of. Understand that you won't know if you've made the right decision on who should be your advisor until AFTER you've been working with them for probably 6 months to a year.

With that in mind, make sure that you don't put your money in investments that have surrender penalties, time commitments or up-front commissions. These act like shackles that will keep you tied to that advisor or be forced to lose a lot of money when changing.

Your posted comments on this and other questions are welcome.
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