THE JOURNEY

Withdrawal strategy key to retirement plan

By Janet Kidd Stewart | Your Money

December 2, 2007

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Q: My wife and I are 55 years old. We have $1.3 million saved, spread out among stocks, bonds, mutual funds, CDs, 401(k) and an ING money market account. I would like to retire by year's end. My wife works part time and makes $24,000 per year. We are debt free. No car, house payments. No kids. If I retire, I lose my salary of $45,000 and health benefits.

We would have to pay out of pocket per month somewhere around $700 to $1,000 for health insurance. I would probably work some kind of part-time job. My wife will probably work another four to five years. Can I retire?

A: It all depends on how much you'll spend, but many people have retired on far less than seven figures. The key is determining how much you can safely withdraw from that portfolio, given that you won't be drawing Social Security for at least several years and knowing you could live another 40 years or more.

Factoring your situation into a computer model developed by Laurence Kotlikoff, a Boston University economics professor, appears to give you the green light for fully retiring now and your wife in four years, even if you both make it to age 100.

"It behooves them to be very careful [with this decision], because that's a long way to go," referring to your age today and life expectancy, said Kotlikoff, who is also president of Economic Security Planning Inc. The company sells the downloadable planning tool for $149, or $164 in CD format (www.esplanner.com).

Kotlikoff believes most planning tools available today encourage overly conservative savings and withdrawal strategies, playing on investors' fears about running out of money. Another drawback, he said, is that most tools don't accommodate big chunks of savings in some years and very little during others.

You indicated your annual living expenses today are about $40,000, including your estimate of future health insurance costs once you give up the job.

But plugging estimates of your future Social Security benefits, investment gains, federal and state taxes (the reader lives in Baltimore) and other factors into the program, Kotlikoff estimates you'll be able to spend $63,259 annually if you retire now, or $66,061 annually if you retire in five years, with inflation adjustments over time. In both situations, he assumed your wife worked another four years. If you purchase an inflation-indexed annuity at age 65 with the $750,000 in your retirement accounts, you'd be able to spend somewhere in the middle of those two figures, beginning now, Kotlikoff said.

These estimates include your Social Security income but do not factor in a lengthy nursing home stay, he said, so you might investigate purchasing long-term-care insurance. It should be affordable given the gap between this allowable spending rate and your estimated expenses.

Why does he focus on a dollar amount, rather than limiting spending to a particular percentage of your preretirement income, which is common in the free online retirement-planning tools?

For many people, the prime earning years include significant spending on a whole family, as opposed to during retirement, when it is typically just a couple. That makes it difficult to really assess what a retiree will need, he said.

So how does all this compare with other retirement spending models?

It's difficult to line them up exactly because of their different assumptions and inputs. Many free online calculators, for example, don't let you select different retirement start dates for each spouse.

Fidelity's MyPlan calculator (www.fidelity.com/myplan) agrees that you have more than enough assets to retire but assumes you are spending significantly less than Kotlikoff's model, at $58,650 before taxes.

The T. Rowe Price calculator (www3.troweprice.com/ric/RIC/) tells you to withdraw no more than $42,120 per year from your portfolio to make it last to age 100, and taxes still would have to come out of that. But this doesn't include your eventual income from Social Security payments.

Kotlikoff's model uses a lot more data points, which he said allows it to require a much smaller portfolio at the start of retirement. That may keep you from oversaving for retirement, but just remember that it provides a much smaller cushion against overspending once you're there.

Have a retirement question? Write to yourmoney@tribune.com, or via mail at Your Money, Chicago Tribune, Room 400, 435 N. Michigan Ave., Chicago, IL 60611. If your letter is selected, we may include you and your question in a future column.

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