Ask Carrie by Carrie Schwab-Pomerantz

Dear Carrie: Many projections of what you need to save for retirement are based on 30 years. But if your life expectancy is only 15 years, is it reasonable to divide those projections by two? — A Reader

Dear Reader: The question for most people facing retirement is: "Will my money last as long as I do?" And you're right — in most cases, the projections are based on the anticipation of a 30-year retirement. In your case, it sounds like you believe your retirement will be half as long. But while it may seem like an easy shortcut to divide your savings needs by two, unfortunately it doesn't work quite that smoothly. Let's look more closely.

THE 4 PERCENT RULE

One of the most commonly accepted guidelines is the 4 percent rule, which asserts that you can safely withdraw 4 percent of your capital in the first year of your retirement and be reasonably sure of being able to withdraw the inflation-adjusted equivalent of that 4 percent for the next 30 years. It's a very complex, simulation-based projection that is designed with one goal in mind: to give you a high degree of confidence (90 percent probability) that your money will last for at least 30 years.

Here's an example: If you have a portfolio worth $1 million and you're retiring at age 62, the 4 percent rule suggests you can take out $40,000 in year one (4 percent of $1 million) and be quite sure you can continue to take out $40,000, adjusted for inflation, over the next 30 years. But this is only a projection, and there are more exceptions to the rule than not. In reality, you might end up at 91 years old with quite a bit of money left. Or it's possible that you could end up with nothing. The rule simply asserts that you have a 90 percent probability of being able to withdraw $40,000, adjusted for inflation, and not run out of money in 30 years.

Change the parameters, and you'll get a different result. For example, if you've got $2 million, not $1 million, the result is straightforward: you could take out $80,000. But if your retirement is only 15 years — half as long — it doesn't mean you can double your withdrawal rate, taking out 8 percent instead of 4. The math isn't linear the way it is with changing the inputs. I consulted with experts, and the answer comes out to about 6.5 percent.

So if you are really confident that you'll only need your retirement assets to last 15 years, you could comfortably withdraw 6.5 percent in year one. That's $65,000 from $1 million in savings.

Remember that you may have other sources of retirement income, such as a pension or Social Security. By the way, most people receive higher benefits by waiting until they're 70 to start receiving Social Security payments, but if you have reason to think your retirement will be half as long, you may prefer to take the benefits as early possible. The Social Security website (www.ssa.gov) has a useful break-even calculator to help you figure out the best time for you to start receiving benefits.

Obviously, it's critical to know how long your money will last, but it's just as important to understand how much money you'll need in retirement. This is pretty easy to do if you're retired (you know how much you're spending). If you're not out of the work force, your take-home pay is a reasonable (and conservative) proxy for your retirement income need.

Ultimately, the key number is the difference between your needs and the income your assets can generate, along with Social Security and pensions. If it's positive, you're fine! If it's negative, you're going to have to change some things or you may risk running out of money early.

Finally, these guidelines are based on the assumption that you will have a 7 percent long-term return from a portfolio composed of approximately 60 percent stocks and 40 percent fixed income and cash. The potential for growth from stocks is crucial; otherwise, you face a higher risk of not keeping pace with inflation.

A good way to manage your portfolio in retirement is to have a year's worth of money in cash, then one-year and two-year CDs for the second and third years, and then the rest in a diversified selection of stocks and bonds. After year one, cash the one-year CD and that money becomes your living expenses for year two, and you'd buy a new two-year CD. That way, you'll have the money you need for the next three years easily accessible.

Hope this is helpful. Best of luck!

Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER (tm) is president of the Charles Schwab Foundation and author of "It Pays to Talk." You can e-mail Carrie at askcarrie@schwab.com. This column is no substitute for an individualized recommendation, tax or personalized investment advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

COPYRIGHT 2009 CHARLES SCHWAB & CO. INC. MEMBER SIPC

DIST. BY CREATORS SYNDICATE INC.

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