Withdrawing Your Money after Retirement

You have been reading about me investing in bonds for retirement for years now. Let’s say you turn 65 years old and submitted your retirement paper at your company. You want to start withdrawing your money from your IRA for so much a month. You are counting on your 401K money and your IRA money to meet your retirement needs.

You might have heard that the 4-percent Rule, otherwise known as the “Prudent Man's Rule,” is a safe way of determining your withdrawal rate from stock and bond market accounts during retirement. Well, this may not be true for you. I am going to show you another reason why my IRA is almost 100% in the High Yield Individual Corporate Bond Market.

The 4-percent Rule suggests that you could take 4% to 5% out of your investment accounts per year without risk of depleting the account within your lifetime. Consider our current economic state. Now consider your retirement during this economy.

As a Stock Speculator, where do you and your finances fit in this scenario?

Wade D. Pfau, Ph.D. wrote a paper entitled “Can We Predict the Sustainable Withdrawal Rate for New Retirees?” which illustrates a study that “attempts to predict sustainable withdrawal rates by quantifying whether a 4 percent withdrawal rate can still be considered safe for U.S. retirees in recent years when stock market valuations have been at historical highs and dividend yields have been at historical lows.”

Pfau states, “I find that a regression model using market fundamentals can explain historical MWRs [maximum sustainable withdrawal rates] fairly well, and that the 4 percent rule is likely to fail for recent retirees.”

During the last years that you are an income-earning worker, the events that take place in financial markets become more significant. For example, consider being ready to retire in 2014 but all your money is in stock or bond mutual funds in 2008. That means you probably lost 60% of your retirement at that time. This happened at a critical time because you plan to start using this money in 6 years in 2014. So you are depending on events less than 10 years before retirement for the health of your retirement account. This is why a 100% High Yield bond account (Not High Yield Bond Fund accounts) is the best vehicle to use for your IRA needs.

If you recently retired, you'll need to think about your rate of withdrawal from your accounts and whether you'll be able to continue on that course without “paring back.” But retirees with stock accounts shouldn’t have to depend on this unpredictable strategy for income, because it will never be predictable!

The 4-percent Rule "cannot be considered safe in light of the unprecedented market conditions of recent years." For example; a 3-year CD is yielding 1.35% and a 10-year treasury, 1.89% may be safe as far of business risk but it is not safe due to inflation and interest rate risk.

You don’t have to depend on an unpredictable vehicle like stocks or government guaranteed securities for income in retirement when you can employ a very secure strategy to give you a more guaranteed income stream.

You can keep your High Yield Bonds in your account. A year or two before you approach your retirement date; you can stop investing your interest accumulating in your account, divide your total cash in your account by 12 and give yourself a monthly income ( Money from 1/20xx to 1/20xx). Keep in mind, you still should reinvest your bond principal when the bonds mature so that you can still continue to get income in future years.

What if I am not smart enough or too lazy to do this for myself?

It is up to you to find out what works to your advantage. Talk to insurance companies, investment brokers, Investment Advisors, and banks. But be careful, they work first in their interest and your interest is secondary. For example, you can turn your investments over to someone that deals in Annuities. But they charge hidden fees for their services. Investment advisors do not charge a fee but place you in mutual funds that charge a fee. In my opinion, banks just take our money and charge you.

As Pfau states, “it would be a great pity if recent retirees scaled down their retirement expenditures and lived a more frugal lifestyle only to find at the end that a higher withdrawal rate could have been sustainable.”

If you are in your 60s, the right annuity could be structured with a 6% to 8% income stream and you would still have control of your money. Instead of taking a chance withdrawing a percentage of your account, where income is not guaranteed for life, consider the alternative: a “hybrid” index annuity with 6% to 8% annual withdrawals and guaranteed income for life, income you cannot outlive.

But don’t get hung up on the word, “guarantee.” No one including the Federal Government can guarantee income. Why? Because it is not the amount of dollars that you get, it is the amount of dollars in relation to inflation that matters to you when you have to spend the money for mortgage, rent, or daily purchases for the rest of your life. Remember, prices always go up!  

What if the lady in the blue just retired at a time when she lost 60% of her money.

Risk can cause a retirement calamity in your account.

The chart below shows the last 38 years of stock market performance. Out of the 38 years shown, we only had 10 years of bear markets (shown in negative numbers). But if you are planing to retire when a bear market hits, it can be devastating to your account. This is the market risk that you are taking. If you are in mutual funds, you are also taking the risk that other investors will pull out due to this bear market causing your balance in the fund to fall sharply. The companies in the fund may fall on bad times due to a change in the economy. That happened in 2007 and the market did not react until 2008. But your funds reacted a year before the market decline. This is business risk. Here lies the reason why in 2007 to 2009 employees saw a 60% decline in their retirement savings. These retirement programs, Mutual Fund 401Ks, and Stock/Mutual Fund IRAs still have not recovered from this calamity.  Here is why many retirement programs are in trouble today.   

Dow Stock Performance Guide

Yearly Stock Returns Index

Year ______Price Gain or Loss______ Percent Gain or Loss

1975__________ 236.17 ______________38.32%

1976 __________152.24 ______________17.86%

1977 _________-173.48 ______________-17.27%

1978 __________-26.16 _______________-3.15%

1979 ___________33.73 _______________4.19%

1980 __________125.24 ______________14.93%

1981 __________-88.98 _______________-9.23%

1982 __________171.55 ______________ 19.61%

1983 __________212.09 _______________20.27%

1984 __________-47.07 ________________-3.74%

1985 __________335.10 _______________27.66%

1986 __________349.28 _______________22.58%

1987 ___________42.88 ________________2.26%

1988 __________229.74 _______________11.85%

1989 __________584.63 _______________26.96%

1990 _________-119.54 ________________-4.34%

1991 __________535.17 _______________20.32%

1992 ___________32.28 ________________4.17%

1993 __________452.98 _______________13.72%

1994 ___________80.35 ________________2.14%

1995 _________1282.68 _______________33.45%

1996 _________1331.15 _______________26.01%

1997 _________1459.98 _______________22.64%

1998 _________1273.18 _______________16.10%

1999 _________2315.69 _______________25.22%

2000 _________-710.27 ________________-6.18%

2001 _________-765.35 ________________-7.10%

2002 ________-1679.87 _______________-16.76%

2003 _________2112.29 _______________25.32%

2004 __________329.09 ________________3.15%

2005 __________-65.51 ________________-0.61%

2006 _________1745.65 _______________16.29%

2007 __________801.67 ________________6.43%

2008 ________-4488.43 _______________-33.84%

2009 ________1651.66 ________________18.82%

2010 ________1149.46 ________________11.02%

2011 _________640.05 _________________5.53%

2012_________882.95__________________7.26%

If you feel you still should invest in stocks or mutual funds, consider the risk!

Market Risk

Perhaps the most significant risk an investor faces is overall market risk. Market risk is the risk that every stock incurs simply by being part of the broader market. You can pick a great stock or mutual fund, which does well for a period of time and then falls dramatically as part of an overall market crash. This is what happened between 2007 and 2009.

 Interest Rate Risk

Stock prices tend to fall when interest rates rise, which makes every stock subject to a degree of interest rate risk. This effect is caused by investors shifting money out of equities and into bonds, certificates of deposit, and other fixed income investments, to take advantage of the higher interest rates. This happened as the United States went into hyper inflation between 1976 and 1979. The country did not break the hyper inflation problem until 1982.

Liquidity Risk

Mutual funds do not tell you this. Mutual fund managers can run into a liqudity risk problem that can drain your fund of money. Funds that invest in alien corporations (outside the United States) are subject to this risk. Liquidity risk is incurred particularly when investing in smaller companies and in stocks that are thinly traded. If your fund is looking to sell a thinly traded stock, it may be necessary to reduce the selling price dramatically, particularly if the fund has a large number of shares to sell, in order to find buyers for all the shares. Liquidity risk is always present but may be reduced by investing in large-cap companies and in companies that normally have a large number of shares traded, since the lower the average volume of shares traded, the higher the liquidity risk.

Competitive Risk

All companies have competitors. A company may see its stock rise dramatically in response to the success of a hot new product, only to see it fall to its original level, or even below, should a competitor introduce a product that is preferred by the market. Since successful products always invite competition, investors should be wary of stocks whose price has risen in response to products that can be easily imitated or replicated by competitors. The same is true with mutual funds. A fund may recieve a lot of good press just to recieve bad press in the future or find itself in management problems. Good press causes investors to buy shares in a fund. That causes the funds price to rise. Bad press causes investors to sell shares in a fund causing the fund to fall in price. Investors money will leave the fund if confidence in the fund falls or confidence in a competitive fund raises.

Legal and Regulatory Risk

Many stocks and industry select mutual funds fall in response to legal and regulatory risks affecting the company or companies involved. Product liability suits, such as those brought against drug companies, the tobacco industry, and auto and consumer product manufacturers, can have a dramatic impact on stock and fund prices. In addition, changes in government regulations, such as those affecting the telecommunications industry, or the introduction of new regulations, can negatively impact companies' stock and select funds. Investors should therefore keep abreast of all legal and regulatory developments affecting companies and selcet funds in which they have invested.