You won’t be able to withdraw an unlimited amount of money in retirement. So a retirement budget is a necessity. Some retirees forego one, only to regret it later.

Run the numbers before you retire. Often people need about 70-80% of their end salaries in retirement, but this can vary. So years before you leave work, sit down for an hour or so (perhaps with the financial professional you know and trust) and take a look at your probable monthly expenses. Online calculators can help.

The closer you get to your retirement date, the more exact you will need to be about your income needs. You first want to look for changing expenses: housing costs that might decrease or increase, health care costs, certain taxes, travel expenses and so on. Next, look at your probable income sources: Social Security (the longer you wait, the more income you can potentially receive), your assorted IRAs and 401(k)s, your portfolio, possibly a reverse mortgage or even a pension or buyout package.

While selling your home might leave you with more money for retirement, there are less dramatic ways to increase your retirement funds. You could realize a little more money through tax savings and tax-efficient withdrawals from retirement savings accounts, through reducing your investment fees, and getting your phone, internet and TV services from one provider.

If you have just retired or are about to, you will enter 2012 with some financial breaks. Social Security benefits will increase by 3.6% next year, Medicare Part B premiums will only rise $3.50 instead of the $10 that Medicare projected, and the Part B deductible will be $22 cheaper in 2012 ($140).

Budget-wreckers to avoid. There are a few factors that can cause you to stray from a retirement budget. You can’t do much about some of them (sudden health crises, for example), but you can try to mitigate others.

• Supporting your kids, grandkids or relatives with gifts or loans.
• Withdrawing more than your portfolio can easily return.
• Dragging big debts into retirement that will nibble at your savings.

Budget well & live wisely. These are times of low interest rates and modest Wall Street gains. Given those factors, creating a retirement budget makes a lot of sense. A budget – and the discipline to stick with it – may make a financial difference.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

The Department of Labor is following through on its promise to update the retirement plan landscape. Three major rule changes are scheduled for the near future. All retirement plan fiduciaries and administrators should be aware of them.

#1: “Covered” service providers must fully describe their services & fees. This rule will take effect on April 1, 2012. It requires “covered” service providers (financial advisors, financial consultants or third-party administrators who expect to receive $1,000 or more in direct or indirect compensation for their services) to detail their compensation and/or fee structure to fiduciaries. (CSPs also include financial advisors or TPAs who act as fiduciaries or Registered Investment Advisors for plan sponsors.) If applicable, the CSP must detail any fees charged for recordkeeping along with recordkeeping methods.^1,2

#2: Fiduciaries must detail fees (and more) to plan participants. If participant-level fee disclosures aren’t provided to plan participants after May 31, 2012, then a plan participant or beneficiary may claim a violation of fiduciary duty on the part of the plan sponsor. For calendar year plans, initial quarterly disclosures must be furnished by August 14, 2012. The new regulations require fiduciaries to disclose (and update)

• Rules related to the dissemination of investment instructions for the plan
• Plan fees and expenses paid from participant accounts (plus a breakdown of these fees, i.e., investment management fees, admin fees, cost-of-advice fees)
• Any other specific fees or charges that may be drawn from a plan participant’s account.^3,6

#3: The DOL is redrafting its fiduciary rule. It intends to come forth with a new rule early in 2012, under which the definition of “fiduciary” could be expanded to include anyone who provides advice to a retirement plan or to IRA owners. A group of nearly 30 Congressional Democrats protested expanding the definition of “fiduciary” in a letter to Labor Secretary Hilda Solis last May, contending that it would backfire and eventually reduce access to investment education and information for plan participants. Nearly 50 House Republicans followed suit with a letter to Secretary Solis in November, urging that the new rule not encompass IRAs. However, Assistant Labor Secretary Phyllis Borzi has indicated that IRAs will be included under the redrafted fiduciary duty rule. The concern among legislators and financial services professionals is that the definition of “fiduciary” will become so vague that even the most basic education and advice could fall under ERISA status, leading to possible headaches for plan providers and plan participants.^4,5

The goal? The DOL wants to make these plans more transparent. This is an occasion for plan advisors to reconnect with plan sponsors, fiduciaries and participants.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Two federal tax reform proposals could make them less attractive.

Massive deficit – and among the many revenue-generating ideas being discussed in Congress, two in particular could have disturbing consequences for employees saving for retirement.

There is no need to panic yet – these ideas are a long way from law. Still, a new report from the nonpartisan Employee Benefit Research Institute (EBRI) indicates that the bipartisan “super committee” of 12 legislators assigned to slash the deficit may be giving them at least a casual look.

What if you couldn’t deduct 401(k) contributions?

In September, representatives from the Brookings Institution proposed a remodel of current 401(k) plan rules at a Senate Finance Committee hearing. The big idea: end tax-deductible contributions to 401(k)s. Both employee salary deferrals and employer matches would be taxed. (Traditional IRA contributions would also be rendered taxable by this proposal.)

So by this concept, you would be taxed twice: once on your 401(k) contributions and once again on your 401(k) withdrawals.

In apology, the federal government would provide employees (and their employers) with its own version of a match: qualified employer and employee contributions would be eligible for a flat-rate refundable tax credit which would be deposited directly into the 401(k). This credit would either be 18% or 30%.

We all know most people don’t save enough for retirement. How would being taxed twice encourage them? In January 2011, an EBRI poll found that 25% of employees would cut back on 401(k) contributions if they weren’t able to deduct them.

What if 401(k) contributions were capped?

Another proposal – courtesy of the National Commission on Fiscal Responsibility and Reform – would put a ceiling on annual contributions to 401(k)s and other defined-contribution retirement plans. The so-called “20/20” modification would limit total annual employer and worker 401(k) contributions to either $20,000 or 20% of an employee’s income, whichever is lower. So this proposal could hurt low-income and high-income workers.

The “super committee” of 12 is under pressure to come up with a plan to hack $1.2 trillion off the federal deficit this month – and when it comes to preferential tax treatment in America, 401(k)s are a nice example. Would the committee dare get behind either of these proposals? Could any politician get reelected amid cries that (s)he wants to cap or double-tax your retirement savings?

As Congress searches for revenue, the tax treatment of 401(k)s may get a second look – and a third. As EBRI research director Jack VanDerhei told a reporter from the financial services industry website AdvisorOne, “I can virtually guarantee that the whole concept of [401(k)] tax preferences will be reexamined in 2012 and 2013.”

This post may not represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

A recap of contribution limit and phase-out adjustments.

The IRS has announced cost-of-living adjustments to IRAs and employer-sponsored retirement plans for 2012, so here is what you need to know about the newly altered contribution limits and phase-outs for these plans.

401(k) & IRA yearly contribution limits. In 2012, these are the annual contribution limits for some popular retirement savings vehicles:

• 401(k)s, 403(b)s, most 457 plans, Thrift Savings Plan (TSP) – $17,000 with an additional $5,500 catch-up contribution allowed for those 50 or older. (2012 COLA: $500.)
• Traditional & Roth IRAs - $5,000 with an additional $1,000 catch-up contribution allowed for those 50 or older. (No 2012 COLA.)
• Simple IRAs - $11,500 with an additional $2,500 catch-up contribution allowed for those 50 or older. (No 2012 COLA.)
• SEP IRAs - $50,000 or 25% of an employee’s compensation, whichever is lesser. (2012 COLA: $1,000.)
• 415(b) defined benefit plans – the limitation on annual benefits under a defined benefit plan is increased to $200,000. (2012 COLA: $5,000.)

Traditional IRA phase-outs. The new MAGI limits affecting deductions for traditional IRA contributions are:

• Singles & heads of household covered by a workplace retirement plan: $58,000-68,000. (2012 COLA: $2,000.)
• Married filing jointly, with spouse making the IRA contribution covered by a workplace retirement plan: $92,000-112,000. (2012 COLA: $2,000.)
• Married filing jointly, IRA contributor not covered by a workplace retirement plan but married to someone who is: $173,000-183,000. That MAGI range is for a couple rather than an individual. (2012 COLA: $4,000.)

Roth IRA phase-outs. The MAGI limits affecting deductions for Roth IRA contributions are set as follows for 2012:

• Singles & heads of household covered by a workplace retirement plan: $110,000-125,000. (2012 COLA: $3,000.)
• Married filing jointly: $173,000-183,000. (2012 COLA: $4,000.)
• Married filing separately, with the Roth IRA contributor covered by a workplace retirement plan: $0-10,000. (No 2012 COLA.)

Lastly, a couple of notes for employers. When it comes to defining “key employees” in a top-heavy plan, the determination limit goes up $5,000 to $165,000 in 2012. The maximum taxable earnings amount for Social Security increases to $110,100 from $106,800 next year.`

What has changed for you in 2010? Did you start a new job – or leave a job behind? Did you retire? Did you start a family? If some notable changes occurred in your personal or professional life, then you will want to review your finances before this year ends and the next one begins.

Even if your 2010 has been comparatively uneventful, the end of the year is still a good time to get cracking and see where you can plan to save some taxes and/or build a little more wealth.

Here are eight questions to review before the ball drops in 2010.

1. When was your last portfolio review?

Many investors fail to incorporate their faith and values into their financial plan. Many also take too little or too much risk. During volatile times like this, would it be great to have peace of mind knowing your portfolio is exactly where it should be – morally and financially sound.

2. Did you practice tax loss harvesting?

That is the art of taking capital losses (selling securities worth less than what you first paid for them) to offset your short-term capital gains. You might want to consider this move, which should be made with the guidance of a financial professional you trust.

In fact, you could even take it a step further. Consider that up to $3,000 of capital losses in excess of capital gains can be deducted from ordinary income, and and remaining capital losses above that can be carried forward to offset capital gains in upcoming years.

There is still the risk that if Congress doesn’t act soon, long-term capital gains will be taxed at 10% for those in the 15% bracket and 20% for those in the higher brackets beginning in 2011. President Obama has himself proposed a 20% top tax rate for capital gains.2 So you might think of triggering excess capital losses in 2010 and using the losses to shelter future long-term capital gains that could be taxed at a higher rate.

If you are in the 10% or 15% brackets (taxable income of $34,000 or less for an individual, $68,000 or less for a married couple), 2010 could be the final year in which you can cash in capital gains without triggering a tax.3

3. Do you itemize deductions?

If you do, great. Now would be a good time to get the receipts and assorted paperwork together. Besides a possible mortgage interest deduction, you might be able to take a state sales tax deduction, a student-loan interest deduction, a military-related deduction, a deduction for the amount of estate tax paid on inherited IRA assets, an energy-saving deduction, a homebuyer credit … there are so many deductions you can potentially claim, and now is the time to meet with your tax professional so that you can strategize to claim as many as you can.

4. Could you ramp up your 401(k) or 403(b) contributions?

If you can do this in November and December, that will lower your taxable income. Do it enough and you might be able to qualify for other tax credits or breaks available to those under certain income limits.

5. Are you thinking of gifting?

How about making a contribution to a charity or some other kind of 501(c)(3) non-profit organization before 2010 ends? In most cases, these gifts are partly tax-deductible. If you pour some money into a 529 plan on behalf of a child, you could get a deduction at the state level (depending on the state).

Of course, you can also reduce the value of your taxable estate with a gift or two. This year, the gift tax exclusion is $13,000 – so you can gift up to $13,000 to as many people as you wish this year, with the understanding that you have a $1 million lifetime limit before you are actually hit with gift taxes.

6. Have you reviewed your estate plan lately?

Take a moment to review the beneficiary designations for your IRA, your life insurance policy, and your retirement plan at work? If you haven’t reviewed them for a decade or more (which isn’t uncommon), double-check to see that these assets will go where you want them to go should you pass away. Lastly, take a look at your will to see that it remains valid and up to date.

7. Should you go Roth before 2010 ends?

The IRS has given you a little incentive to do so: if you convert a traditional IRA to a Roth in 2010, you can optionally split the income taxes stemming from the conversion across 2011 and 2012 – without increasing your 2010 taxable income. If you wait until 2011 to make the conversion, that choice won’t be there.

8. Do you have a student in college or a private K-12 school?

If you’re paying for private school with Coverdell ESA funds, here’s an alert: the annual contribution limit is dropping from $2,000 to $500 in 2011, and primary and secondary school tuition will no longer count as a qualified expense next year. In 2010, you can buy your college student computer hardware, computer software and Internet service with funds from a 529 account; you won’t be able to do that in 2011. You’ll also want to see if you can claim the American Opportunity Credit (which is as much as $2,500 per student) for qualified college expenses in 2010; it may or may not be extended for 2011.

What’s your next step?

Analyzing the Ten Key Areas of  Your Faith-Based Financial Plan

1: Ownership. God Owns 100% of everything. This i the foundation of any plan determining who is the owner of all that is entrusted to you.

Key Verses:

Haggai 2:8 “The silver is mine and the gold is mine,” declares the Lord.

Psalm 24:1 “The earth is the Lord’s, and everything in it, the world and all who live in it.”

Key Coaching Areas:

• Assess attitudes & motives in your personal financial planning.

• Rather than, “How do I protect/use my money?” the question becomes, “How can I best look after/use God’s money?”

• To rely on God and his provision not on our wealth or our ability to create wealth.

2: Integrity.  Business, Personal, and Financial Life Coaching. I find many people who do not have passion in their lives.  They lack the motivation and drive to succeed because their dreams and goals may be out of alignment.

Key Verses:

Colossians 3:22-24 “Slaves obey your earthly masters in everything; and do it not only when their eye is on you and to win their favor, but with sincerity of heart and reverence for the Lord”

1 Timothy 6:20 “Timothy, guard what has been entrusted to your care.”

Key Coaching Areas:

In Personal life:

• Tax minimizing is fine – response to “cash” deal?

• Responsibilities as a Christ-Follower

• How do you grow spiritually?

In Business life:

• Responsible employer – what are your measures of success?

• Honorable accounting & management practices.

• Fair treatment of employees.

In Financial Life:

• Parable of the Talents:  how do you maximize all God entrusts to you?

• Moral & Ethical investments?

3: Generosity: How do you get more so you can give more? As Christ followers, we should be known for what we stand for.  How can we be more generous and help more of God’s people?

Key Verses:

Leviticus 27:30 “A tithe (10%) of everything from the land whether grain from the soil or fruit from the trees belongs to the Lord; it is holy to the Lord.”

2 Corinthians 9:7 “Each man should give what he has decided to give, not reluctantly or under compulsion, for God loves a cheerful giver.”

Key Coaching Areas:

• What should I give? To whom should I give? When should I give?

• Planning the budget after deciding on giving not before. Give first, then decide on other  spending.

• Giving without guilt, generously and with grace.

4: Planning:  Creating your roadmap – where are you heading? Without a plan, it is nearly impossible to reach your desired destination.

Key Verses:

Proverbs 6:6&8 – “Go to the ant you sluggard; consider its ways and be wise! .. it stores its provisions in summer and gathers its food at harvest.”

Proverbs 21:20 – “In the house of the wise are stores of choice food and oil, but a foolish man devours all he has.”

Luke 14:28-30 – Building a tower.

Key Coaching Areas:

• Knowing what God has called you to do with your life and your money. Do your current practices help or hinder?

• Setting goals for (e.g.):

* Giving

* Budgeting/spending plan

* Paying off debt

* Saving, financial independence

* Providing for dependents

* Funding your calling

5: Budgeting:  Getting your money to work for you instead of you working for your money. No matter how little or how much you make, without a spending plan, you could spend more than you make.  This is one of the biggest financial mistakes.

Key Verses:

Proverbs 25:28 “Like a city whose walls are broken down is a man who lacks self control.”

1 Timothy 6:6-8 “But godliness with contentment is great gain…But if we have food and clothing we will be content with that. People who want to get rich fall into temptation and a trap…”

Key Coaching Areas:

• Know how much (a) income there is. Know how much (b) spending there is. Keep (b) less than (a).

• Run a spending plan – think future not past, “What shall I spend my money on next  week/month/year?”

• Avoid a consumptive lifestyle, living beyond your means.

• Avoid the compulsion to spend, spend, spend; keeping up with the Jones’.

6: Borrowing: Getting and staying out of debt. This focuses on being a cautious debtor and only using debt as a last resort.

Key Verses:

Proverbs 22:7 “The rich rule over the poor, and the borrower is servant to the lender”

Romans 13:8 “Let no debt remain outstanding.”

Key Coaching Areas:

• Poor budgeting & spending more than you earn leads to debt.

• Debt restricts flexibility and choice.

• Debt presumes upon and mortgages the future.

• How much should we borrow and for how long?

7: Saving for a rainy day: Creating and maintaining emergency funds and funding your future. Those who save and have emergency funds are better prepared for difficult times.  The past few years have shown us the importance of having a proper savings strategy.

Key Verses:

Proverbs 28:19 “He who works his land will have abundant food, but the one who chases fantasies will have his fill of poverty.”

Proverbs 21:20 “… a foolish man devours all he has.”

Key Coaching Areas:

• Save to build an emergency fund (equivalent of 3 months of income).

• Save for major purchases to avoid debt (water heater, automobile repairs, home entertainment system, vacation, etc.).

• Save for future needs and giving (missionaries, charitable gifts, friends in need, etc.).

• Save for retirement.

8: Investing with a Purpose: Using your Blessings to Bless Others. Many invest without a purpose – just to accumulate. Additionally many invest in companies that are far removed from their faith and values. Let’s look at what values are important to you and create an investment plan around those values.

Key Verses:

Proverbs 13:11 – Dishonest money dwindles away, but he who gathers money little by little  makes it grow.

Ecclesiastes 11:2 “Give portions to seven, yes to eight, for you do not know what disaster may come upon the land.”

Key Coaching Areas:

• Get rich slow/don’t try to get rich quick – risk?

• Don’t hoard but invest for a purpose.

• Invest with the/an end in mind & work out a realistic target.

• Faith-based investing – choosing your investments

• Asset allocation and diversification

9:  Protecting All God Places in Your Care:  Prudent Strategies. Having proper insurance plans in place are critical.  This includes health, life, disability, long-term care, and property insurances.

Key Verses:

1 Timothy 5:8 “if anyone does not provide for his relatives, and especially for his immediate family, he has denied the faith and is worse than an unbeliever”

Ecclesiastes 5:13 “wealth lost through some misfortune so that when he has a son there is nothing left for him…”

Key Coaching Areas:

• God protects us but we should provide.

• How much insurance is wise? Can you over insure or under insure?

• Looking at proper amounts and if you should carry life, health, disability, home & auto, liability, and long-term care insurance

10: Legacy Planning – How will you be remembered? This involves setting up an estate plan – wills, trusts, health care directions, and powers of attorney.  This also includes charitable gifting strategies.

Key Verses:

Proverbs 13:22 “A good man leaves an inheritance to his children’s children, And the wealth of the sinner is stored up for the righteous.”

Proverbs 17:2 “A servant who acts wisely will rule over a son who acts shamefully, And will share in the inheritance among brothers.”

Key Coaching Areas:

• Analyzing your wills, trusts, and beneficiary designations

• Making sure you have all the proper legal documents and organizing your affairs to make it easier on your beneficiaries

• Legacy planning tools

• Getting your wishes on paper

You want to retire, and you own a large home that is nearly or fully paid off. The kids are gone, but the upkeep costs haven’t fallen. Should you retire and keep your home? Or sell your home and retire? Maybe it’s time to downsize.

Lower expenses could put more cash in your pocket. If your home isn’t paid off yet, have you considered how much money is going toward the home loan? The typical mortgage payment in the U.S. represents about 30% of gross income and about 50% of after-tax income. When you move to a smaller home, your mortgage expenses may diminish and your cash flow may greatly increase – and don’t forget about interest savings over the life of the loan.

Cut your taxes?

You might even be able to buy a smaller home with cash (if finances permit) and cut your tax liability. Optionally, that smaller home could also be in a region with lower income taxes and a lower cost of living. You could capitalize on some home equity. Why not convert some home equity into retirement income? If you were forced into early retirement by some corporate downsizing, you might have a sudden and pressing need for retirement capital – another reason to sell that home you bought decades ago and head for a smaller one.

The lifestyle reasons to downsize (or not). Maybe your home is too much to keep up, or maybe you don’t want to climb stairs anymore. Maybe a condo or an over-55 community appeals to you. Maybe you want to be where it seldom snows. On the other hand, you may want and need the familiarity of your current home and your immediate neighborhood (not to mention the friends attached).

If you decide to downsize, it may not pay to wait. Anyone who wants to retire in the current economy needs all the financial resources that can be mustered. Of course, the real estate market will eventually improve; it depends on how long you want to wait for improvement. Some people want to retire and then sell their home, but it may be wiser to sell a home and then retire since homes tend to sit on the market these days. If you sell sooner instead of later, you can always rent until you find a smaller house that could save you thousands (or tens of thousands) of dollars.

When retirement planners try to estimate just how much money a couple or individual should take out of their savings annually, their model scenarios often assume a 4% annual withdrawal rate. Why is 4% used so frequently? Was that percentage plucked out of thin air? No, it actually became popular back in the 1990s.

The “Trinity Study” helped popularize the 4% guideline.

In 1998, a trio of professors at San Antonio’s Trinity University analyzed historical market data between 1925 and 1995 in search of a “sustainable” withdrawal rate. They used five different portfolio compositions – 100% stocks, 100% bonds, and 25/75, 50/50 and 75/25 mixes. (For purposes of the study, “stocks” equaled the S&P 500 and “bonds” equaled long-term, high-grade domestic debt instruments.) They tried to see which withdrawal rates would leave these portfolios with positive values at the end of 15, 20, 25 and 30 years.

Their conclusion? If you are retired and withdraw more than 5% annually, you increase the chances of depleting your portfolio during your lifetime.  Subsequently, another such study was conducted by RetireEarly.com using financial market data from 1871 to 1998 – and that report reached the same conclusion.

However, that wasn’t all the study had to say

The “Trinity Study” made some other conclusions that were not entirely in agreement. The professors maintained that most retirees should have 50% or more of their portfolios in stocks. But they also noted that retirees withdrawing just 3-4% a year from stock-dominated portfolios may end up helping their heirs get rich while hurting their own standard of living.

Perhaps most interestingly, the study concluded that an 8-9% withdrawal rate from a stock-heavy portfolio was sustainable for a period of 15 years or less – but not for longer periods.¹ In other words, while our parents and grandparents could confidently withdraw 8-9%, we who might easily live to age 90 or 100 probably can’t.

Another 4% advocate: Bill Bengen

In 1994, Certified Financial Planner™ practitioner William P. Bengen published a landmark article in the Journal of Financial Planning presenting his own research findings on withdrawal rates from retirement savings. While Bengen published this article in the middle of a long bull market, he factored in the possibility of extended bear markets, minimal annual stock market gains and sustained high inflation.

Looking at 75 years worth of stock market returns and retirement scenarios, Bengen concluded that a retiree who was 50-75% invested in stocks should draw down a portfolio by 4% or less per year. He felt that retirees who did this had a great chance of making their retirement money last a lifetime. In contrast, he felt that retirees taking 5% annual withdrawals had about a 30% possibility of eventually outliving their money. He put that risk at better than 50% for retirees withdrawing 6-7% per year.

Over time, people began to call Bengen’s dictum the “4% drawdown rule”. The model 4% income distribution could be inflation-adjusted – in year one, 4% of a portfolio could be withdrawn, in year two that 4% withdrawal amount could be sweetened by .03% for 3% inflation, and so on.

A dissenting view

In 2009, William Sharpe (one of the Nobel Prize-winning principals of Modern Portfolio Theory) published an article in the Journal of Investment Management contending that “it is time to replace the 4% rule with approaches better grounded in fundamental economic analysis.” Sharpe thinks that “the 4% rule’s approach to spending and investing wastes a significant portion of a retiree’s savings and is thus prima facie inefficient.” If a portfolio underperforms, he notes, you have a spending shortfall; and if it surpasses performance expectations, you end up with a “wasted surplus”.

So in Sharpe’s view, by adhering to a 4% rule, you either risk living too large or short-changing yourself. Therefore, it would be better to constantly fine-tune a withdrawal rate according to time horizon and market conditions.

While not necessarily a rule, 4% is a frequent recommendation

There is some compelling research to support the “4% rule”, and that is why financial advisers often cite it and tell retirees not to withdraw too much. Would withdrawing 4% of your portfolio annually (with adjustments for inflation) allow you to live well? For some of us, the answer will be yes; others will need to address an income shortfall. As we retire, most of us will want to practice some degree of growth investing. Now may be the right time to talk about it.

Can you withdraw more than 4%?

When retirement planners try to estimate just how much money a couple or individual should take out of their savings annually, their model scenarios often assume a 4% annual withdrawal rate. Why is 4% used so frequently? Was that percentage plucked out of thin air? No, it actually became popular back in the 1990s.

The “Trinity Study” helped popularize the 4% guideline.

In 1998, a trio of professors at San Antonio’s Trinity University analyzed historical market data between 1925 and 1995 in search of a “sustainable” withdrawal rate. They used five different portfolio compositions – 100% stocks, 100% bonds, and 25/75, 50/50 and 75/25 mixes. (For purposes of the study, “stocks” equaled the S&P 500 and “bonds” equaled long-term, high-grade domestic debt instruments.) They tried to see which withdrawal rates would leave these portfolios with positive values at the end of 15, 20, 25 and 30 years.

Their conclusion? If you are retired and withdraw more than 5% annually, you increase the chances of depleting your portfolio during your lifetime.  Subsequently, another such study was conducted by RetireEarly.com using financial market data from 1871 to 1998 – and that report reached the same conclusion.

However, that wasn’t all the study had to say

The “Trinity Study” made some other conclusions that were not entirely in agreement. The professors maintained that most retirees should have 50% or more of their portfolios in stocks. But they also noted that retirees withdrawing just 3-4% a year from stock-dominated portfolios may end up helping their heirs get rich while hurting their own standard of living.

Perhaps most interestingly, the study concluded that an 8-9% withdrawal rate from a stock-heavy portfolio was sustainable for a period of 15 years or less – but not for longer periods.¹ In other words, while our parents and grandparents could confidently withdraw 8-9%, we who might easily live to age 90 or 100 probably can’t.

Another 4% advocate: Bill Bengen

In 1994, Certified Financial Planner™ practitioner William P. Bengen published a landmark article in the Journal of Financial Planning presenting his own research findings on withdrawal rates from retirement savings. While Bengen published this article in the middle of a long bull market, he factored in the possibility of extended bear markets, minimal annual stock market gains and sustained high inflation.

Looking at 75 years worth of stock market returns and retirement scenarios, Bengen concluded that a retiree who was 50-75% invested in stocks should draw down a portfolio by 4% or less per year. He felt that retirees who did this had a great chance of making their retirement money last a lifetime. In contrast, he felt that retirees taking 5% annual withdrawals had about a 30% possibility of eventually outliving their money. He put that risk at better than 50% for retirees withdrawing 6-7% per year.

Over time, people began to call Bengen’s dictum the “4% drawdown rule”. The model 4% income distribution could be inflation-adjusted – in year one, 4% of a portfolio could be withdrawn, in year two that 4% withdrawal amount could be sweetened by .03% for 3% inflation, and so on.

A dissenting view

In 2009, William Sharpe (one of the Nobel Prize-winning principals of Modern Portfolio Theory) published an article in the Journal of Investment Management contending that “it is time to replace the 4% rule with approaches better grounded in fundamental economic analysis.” Sharpe thinks that “the 4% rule’s approach to spending and investing wastes a significant portion of a retiree’s savings and is thus prima facie inefficient.” If a portfolio underperforms, he notes, you have a spending shortfall; and if it surpasses performance expectations, you end up with a “wasted surplus”.

So in Sharpe’s view, by adhering to a 4% rule, you either risk living too large or short-changing yourself. Therefore, it would be better to constantly fine-tune a withdrawal rate according to time horizon and market conditions.

While not necessarily a rule, 4% is a frequent recommendation

There is some compelling research to support the “4% rule”, and that is why financial advisers often cite it and tell retirees not to withdraw too much. Would withdrawing 4% of your portfolio annually (with adjustments for inflation) allow you to live well? For some of us, the answer will be yes; others will need to address an income shortfall. As we retire, most of us will want to practice some degree of growth investing. Now may be the right time to talk about it.

We’ve all heard about the “new retirement”, the mix of work and play that many of us assume we will have in our lives one day. We do not expect “retirement” to be all leisure. While this is becoming a cultural assumption among baby boomers, it is interesting to see that certain financial assumptions haven’t really changed with the times.

In particular, there are two financial misconceptions that baby boomers can fall prey to – assumptions that could prove financially harmful for their future.

#1) Assuming retirement will last 10-15 years. Historically, retirement has lasted about 10-15 years for most Americans. The key word here is “historically”. When Social Security was created in 1933, the average American could anticipate living to age 61. By 2005, life expectancy for the average American had increased to 78.

However, some of us may live much longer. The population of centenarians in the U.S. is growing rapidly – the Census Bureau estimated 71,000 of them in 2005 and projects 114,000 for 2010 and 241,000 in 2020. It also believes that 7.3 million Americans will be 85 or older in 2020, up from 5.1 million 15 years earlier.

If you’re reading this article, chances are you might be wealthy or at least “affluent”. And if you are, you likely have good health insurance and access to excellent health care. You may be poised to live longer because of these two factors. Given the landmark health care reforms of the Obama administration, we could see another boost in overall American longevity in the generation ahead.

Here’s the bottom line: every year, the possibility is increasing that your retirement could last 20 or 30 years … or longer. So assuming you’ll only need 10 or 15 years worth of retirement money could be a big mistake.

In 2010, the American Academy of Actuaries says that the average 65-year-old American male can expect to live to 84½, with a 30% chance of living past 90. The average 65-year-old American female has an average life expectancy of 87, with a 40% chance of living past 90.

Most people don’t realize how much retirement money they may need. There is a relationship between Misconception #1 and Misconception #2 …

#2) Assuming too little risk. Our appetite for risk declines as we get older, and rightfully so. Yet there may be a danger in becoming too risk-averse.

Holding onto your retirement money is certainly important; so is your retirement income and quality of life. There are three financial issues that can affect your quality of life and/or income over time: taxes, health care costs and inflation.

Will the minimal inflation we’ve seen at the start of the 2010s continue for years to come? Don’t count on it. Over the last few decades, we have had moderate inflation (and sometimes worse, think 1980). What happens is that over time, even 3-4% inflation gradually saps your purchasing power. Your dollar buys less and less.

Here’s a hypothetical challenge for you: for the rest of this year, you have to live on the income you earned in 1999. Could you manage that?

This is an extreme example, but that’s what can happen if your income doesn’t keep up with inflation – essentially, you end up living on yesterday’s money.

Taxes will likely be higher in the coming decade. So tax reduction and tax-advantaged investing have taken on even more importance whether you are 20, 40 or 60. Health care costs are climbing – we need to be prepared financially for the cost of acute, chronic and long-term care.

As you retire, you may assume that an extremely conservative approach to investing is mandatory. But given how long we may live – and how long retirement may last – growth investing is extremely important.

No one wants the “Rip Van Winkle” experience in retirement. No one should “wake up” 20 years from now only to find that the comfort of yesterday is gone. Retirees who retreat from growth investing may risk having this experience.

How are you envisioning retirement right now? Has your vision of retirement changed? Is retiring becoming more and more of a priority? Are you retired and looking to improve your finances? Regardless of where you’re at, it is vital to avoid the common misconceptions and proceed with clarity.

There are five major problems with tax-deferred plans at work, whether you have a 401(k), 403(b) or another plan at work.  Here are 5 reasons your plan may be a bad investment:

1st Problem: Limited Choices.

For most, this provides two challenges: the limited ability to screen your investments for moral or social issues important to you and the limited ability to find the best investment vehicles (place to get the highest potential return).

2nd Problem: No personal relevance.

When you simply select funds from a plan at work, there is no personal meaning or connection to your life. You are handing your money over to someone else who does not know you or anything about your situation. Your faith is in the hands of a money manager or team of managers and fully out of your control. Why do you think so many people stop contributing to a 401(k) when the markets are going down? If instead your investments had relevance to your life and were in full alignment with your faith, values, belief, and mission in life don’t you think you would continue investing?

3rd Problem: High Fees.

Most retirement plan fees are hidden beneath layers and layers of costs assumed by mutual funds. There are the widely publicized expenses reflected in the prospectus of the mutual fund listed under the expense ratio. But there are also broker fees, trading costs, commissions, and other fees that you can find only in what is called the Statement of Additional Information (SAI). These additional expenses are difficult to determine, but a 2007 analysis by Virginia Tech, the University of Virginia, and Boston College revealed that the average SAI charge is 1.44 percent per year. This is in addition to the 1.56 percent charged by the average Annual Expense Ratio. In other words, the total charge of the average mutual fund is 3.00 percent per year.

4th Problem: Ticking Tax Time Bomb.

Make no mistake about it. The government knows how to generate future tax revenue at your expense. They do this by allowing you to take tax breaks today in exchange for much larger tax bills in the future. Many people just look at the tax benefits of tax deferral and neglect to factor in that what used to be a $5,000 tax write-off is now a tax bill for tens or even hundreds of thousands of dollars. Uncle Sam is no fool. He’s figured out how to entice you into funding his future spending.

5th Problem: Lack of Liquidity and Accessibility.

If you need access to your funds prior to age 59 1/2, your retirement plan generally will have a 10% penalty and you may also owe federal and state taxes. Often a withdrawal from a retirement account can cost you 40% of more. That means every $10,000 would lose $4,000 in taxes and penalties…that’s not what you can easily accessible. Of course there are exceptions to the rule, but in most cases, your retirement plan at work is very inflexible and costly if you need to access the funds.

Also SEE:

401ks: see what you’re really paying

Is Nationwide on your Side?