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University of Massachusetts Amherst

Family Business Center

Will You Have Enough to Retire?

by Shel Horowitz

Richard Chase, of FBC sponsor Meyers Brothers Financial Advisors, Inc., told members of the Family Business Center to analyze all their assumptions about retirement income and expenses. The more accurate your planning, the more comfortable your retirement.

But too many people make the mistake of assuming that whatever numbers work today will continue to work. If your retirement is tied to the markets, your financial security can fluctuate wildly. Average yields are fairly meaningless. Depending on how the investment worked, a $100,000 investment, withdrawing $15,000 per year, with an average yield of 11.6% per year, could leave the retiree with anywhere from a gain of $120,285 to a loss of $55,722. Yet, mapping the same time cycles with a flat $10,000 investment per year changes that loss to a gain of $256,038! In other words, the best strategy for saving $10,000 per year was the worst strategy for withdrawing $15,000 annually from a $100,000 initial nest egg.

Confused? You're not alone! The reason the second investment strategy didn't work out was that the market recovery wouldn't matter; you'd already be out of money. With no assets to appreciate, the recovery doesn't help this investor at all.

People who retired in 1999, projecting strong and steady growth from the long bull market, will be devastated at retirement. Assets that they've counted on will evaporate early, and it may be impossible to catch up. If they banked on enough money to live for another 30 years, they could be in for a deep shock when they run out of money in far less time.

For someone who retired earlier and rode that huge bull market, retirement will look pretty comfortable, even with the losses of the past few years--because so much capital was accumulated that things are still well ahead of projections over the life of the retirement payout.

For each investor, the timing of bull and bear markets has a significant impact on financial security.

If you are still in accumulation mode, a bear market is great, because you can acquire investment assets at a discount. But at withdrawal time, a bear market early in the cycle could be crippling. Chase presented a hypothetical couple who planned to withdraw 8.5% of their portfolio each year for 30 years, starting in 1968&emdash;but they run out of money in 1981. Even dropping withdrawals down to 6% was not enough to sustain the portfolio; they still run out of money in 1995.

Yet, if market performance had been reversed, and the early bear market had been bullish, their initial 1968 balance of $250,000 would have grown to a very comfortable $1,250,452 by the end of 1998.

"Ideally, you would get your high returns when you have a lot of money and your bad returns when you had very little," Chase
noted.

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