Whole Fitness Fanatics

SUMMER 2009

U P D A T E

The Impact of Market Declines

It certainly doesn’t seem fair. You’ve done your part by diligently setting

aside funds for your child’s college education. But if your child

will be entering college soon, market declines may have reduced your

investments so much that you’ll need to find other ways to pay those college

costs. Some tips to consider include:

 

ü Realize that everything doesn’t have to be finalized by your

child’s freshman year of college. College expenses will be paid

out over a four-year period, so you have time for investments to recover.

 

ü Consider alternative strategies to pay for college. For instance,

you can keep your investments in stocks, obtaining loans to pay for

college. Then, if your stock investments recover, you can sell them.

 

ü Keep saving for your child’s college expenses. The average cost

of tuition at a four-year public university was $6,585 for the

2008–09 school year (Source: Trends in College Pricing, 2008). Saving

$550 per month for one year will pay that tuition.

 

ü Reevaluate your child’s and your expectations. If your preferred

college is out of your price range, there are many colleges providing

a good education at a reasonable price. Look into other ways to reduce

college costs, such as starting at a community college or accelerating studies

to complete a four-year degree in three years.

 

ü Have your child work part-time during college. Make your child

responsible for some of his/her expenses, perhaps books, room and

board, or personal expenses.

 

How Much Can You Withdraw in Retirement?

How much to withdraw

annually from your retirement

assets is probably one

of the most important decisions

you’ll make when you retire. Several

factors need to be considered

when calculating your withdrawal

rate, including your life expectancy,

expected long-term rate of return,

expected inflation rate, and how

much principal you want remaining

at the end of your life. Unfortunately,

life expectancies, rates of return,

and inflation are difficult to predict

over a retirement period that can

span decades. Keep these points in

mind:

 

ü Your life expectancy.

 

While it’s easy enough to find out

your actuarial life expectancy, life

expectancies are only averages.

Approximately half the population

will live longer than those tables

suggest. How long close relatives

lived and how healthy you are can

help you gauge your life expectancy.

Just to be safe, you might want to

add five or 10 years to that age.

After all, you don’t want to run out

of money at age 75 or 80, when you

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ü Rate of return.

 

Expected rates of return are often

derived from historical rates of return

and your current investment allocation.

Historical rates of return are

averages of returns over a period of

time. You might want to be more

conservative than that, assuming a

rate of return lower than long-term

averages. Even if you get the average

return correct, the pattern of

actual returns can significantly affect

your portfolio’s balance. For

instance, if you experience higher

returns in the early years of retirement

when your portfolio balance is

higher and lower returns in the later

years when your portfolio’s balance

is lower, you’ll have a higher ending

balance than if the opposite occurred.

 

ü Expected inflation.

 

While inflation has been relatively

tame recently (2.7% over the past 10

years), it was 4.1% in 2007. Over the

past 30 years, inflation has averaged

4.2% (Source: Bureau of Labor Statistics,

2008). Inflation of 4% can

have a dramatic impact on your

money’s purchasing power over a

long retirement. For instance, at 4%

inflation, $1 is worth 68¢ after 10

years, 46¢ after 20 years, and 31¢

after 30 years.

So what is a reasonable percentage

to withdraw on an annual basis?

To be conservative, it is typically recommended

that you only withdraw

modest amounts from your retirement

savings, especially in the early

years of your retirement. A common

rule of thumb is to withdraw no more

than 4% in your first year of retirement,

adjusting that amount annually

for inflation.

With an asset allocation of 60%

stocks and 40% bonds, one study

found that over a 30-year period,

withdrawing 4% initially and

increasing withdrawals by 3% annually

would result in an 87% probability

of ending that period with assets

remaining. A 5% withdrawal rate

would reduce the probability to 63%,

with the probability going down to

38% with 6% withdrawals and 19%

with 7% withdrawals (Source: AAII

Journal, August 2008).

Consider these tips when deciding

how much to withdraw:

 

ü Use a modest withdrawal

percentage to ensure you

don’t deplete your assets.

 

While you should go through the process of

determining how much to withdraw

based on your unique circumstances,

be prepared for modest withdrawal

percentages. With a $1,000,000

portfolio, a 4% withdrawal equals

$40,000.

 

ü Review your calculations

every year. This is especially

important during your early retirement

years. If you’re depleting your

assets too rapidly, you can make

changes to your portfolio, reduce

your expenses, or consider going

back to work. As you age, your

options tend to become more

limited.

 

ü Work as long as you can.

 

Supporting yourself for a

retirement that could span 25 or 30

years requires huge sums of money.

Consider working at least a couple of

years longer than originally planned.

During those years, you continue to

build your retirement assets, and you

delay making withdrawals from

those assets. Once you retire, consider

working at least part-time to

reduce your withdrawals from your

retirement assets. Even modest earnings

can help tremendously. For

instance, if you earn $20,000 annually,

that is the equivalent of a 4%

withdrawal from a $500,000 portfolio.

Please call if you’d like help with

this decision.