May 17, 2013
How much do you need to retire?
Posted by Chloe Lutts Jensen
“How much do you need to retire? (Or, if you are already retired, how much can you safely spend?) These are the most important financial questions that our clients face. Although each family’s situation may call for a different answer, there are some guidelines that will serve most investors well.
“In October 1994, William Bengen published an article in the Journal of Financial Planning in which he analyzed (using Ibbotson data) how much an investor with 50% in the S&P 500 and 50% in intermediate-term Treasury notes could safety withdraw without depleting his savings. He found that for all 30-year periods covered within the data available to him, an investor could withdraw 4% of principal initially and increase that amount with inflation without running out of money. Subsequent to the publication of his study, it turned out that investors who had started drawing on their retirement assets in the mid-1960s would have run out of money in less than 30 years after the ravages of the 1966-1982 period (when inflation outpaced stock and bond returns).
“The problem with the conclusions of that study is the doubt that stocks and bonds will match their long-term historical returns in the future. This is especially true in the case of bonds where the historical return of 5.4%/year total return in the Ibbotson series is mathematically improbable with interest rates as low as they are now.