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| BondsOnline.com: instant access to and extensive coverage of over 3.5 million stocks, bonds, indexes and other securities covering major and emerging markets and exchanges across the globe. |
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| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Retirement's 4% Rule: Why Mr. & Mrs. Income Don't Need It (Part 1) |
Seeking Alpha - August 29, 2011 - By David Van Knapp
Remember the Growths?
In two previous articles, we met Mr. & Mrs. Growth. They were saving for retirement following common practices, including shooting for “The Number” and planning to withdraw from their nest egg during retirement.
Retirement’s 4% Rule: Surprising Answers You Need to Know about the Inflation Factor
Retirement’s 4% Rule: The Importance of Return Sequence
They diligently saved all their lives for retirement, amassing $1,000,000 in assets. With the help of their financial planner, Ms. P, they diversified their wealth into a variety of asset classes that she said created a safe portfolio. Safety is important to them, as they consider themselves conservative and risk-averse when it comes to investing. Plus having saved a million bucks, they did not want to put it at risk by mishandling their retirement.
Ms. P explained to them how they should apply the 4% withdrawal rule to finance the rest of their lives. But it’s trickier than they imagined. She showed them some charts that were outputs of Monte Carlo testing on their portfolio. Under lots of scenarios, they discovered, their money won’t last for 30 years. Not only that, toward the end of their golden years, their portfolio may take a sickening plunge towards zero—even if it makes it to 30 years with some assets left. How could this be? After all, they are millionaires!
There are two culprits. The first is inflation. Their portfolio may get eaten away by annual, tiny-looking increases in their withdrawals that Ms. P says they need to make to keep up with inflation. Those increases are like termites bringing down a building. Ms. P told them that they could start out with a 4% withdrawal the first year ($40,000), then add 3% each year to stay even with inflation. The idea is that the value of their assets will expand over time, covering the extra 3% withdrawal each year. Now, they are shocked to find, it doesn’t always work out. Their initial $40,000 withdrawal in Year 1 of retirement compounds all the way up to a $94,264 withdrawal in Year 30. They had never thought much about compounding before, but now they realize that it produces an exponential result. That Year-30 withdrawal is more than 9% of their entire original million-dollar nest egg.
The second culprit is the withdrawals themselves. By liquidating assets from their portfolio to create income each year, they have fewer assets remaining after each withdrawal. The only way the withdrawal scheme can work is if the value of the remaining assets expands enough to cover the amount sold. That does not need to happen each and every year, but it does need to happen in the aggregate. It’s especially important in the first few years of retirement. If that value expansion fails to happen, the entire withdrawal scheme for funding retirement fails. The technical term for this is blows up. In the first two articles, I ran some scenarios to demonstrate how the Growths’ seemingly well-conceived retirement plan—based on Modern Portfolio Theory and utilizing the “safe” 4% rule—might blow up.
For the complete article.
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Income Security Recommendation January 2013 Issue.
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