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need to know
All 10 S&P 500 sectors decline in August
Apple will let iPhone and iPad users block ads
J.C. Penney upgraded by Deutsche Bank
Wal-Mart cuts worker hours at some stores
5 silly new words in the Oxford dictionary

Personal beliefs don’t belong in retirement accounts

Unlucky lottery winner gets IOU from Illinois

Ode to that legendary New York steakhouse the Palm

When you absolutely, positively need a cocktail

Teacher with 111 tardies puts blame on breakfast

Automat concept is back — with a lot more quinoa

If Donald Trump can do it, why not Kanye West?

Scott Walker's backers seek a reboot of his campaign
Scott Walker’s backers seek reboot of campaign
Scott Walker wants a wall — with Canada

Dissatisfied voters are fueling Sanders and Trump
Clinton says she supports ‘revolving door’ bill
Biden a tougher matchup than Clinton: poll

Ruling in ‘Deflategate’ expected by end of this week
Greedy owners are NFL preseason winners

Disney to unveil ‘Star Wars’ toys in unboxing event
Walt Disney leads Dow's losers for August

How teen clothing retailers compete today

Sunday is Warren Buffett's 85th birthday
Happy 85th birthday to the $67 billion man


Why BlackBerry is a more attractive buyout target than Twitter
BlackBerry is a better buyout target than Twitter
Twitter's stock jumps after analyst upgrade

Our kids aren’t doomed to be poorer than we are

Now is the time to fix your investment portfolio
Now is the time to fix your investment portfolio
Both worry, be happy stocks aren’t a sure bet

Facebook users flood Mark Zuckerberg with thank you’s
Facebook users flood Mark Zuckerberg with thanks

‘War Room’ is a ‘resounding success’ at box office

By this measure, stocks have weathered the worst
By this measure, stocks have weathered the worst

Cheeseburgers and happiness always on the menu for Warren Buffett — and Jimmy Buffett, too
Farrell: Recipes for happiness, from Buffett and others

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Markets »

141.44MDow Volume:
Avg Vol: 109.98M
Unchanged
217
Decliners
3378
Advancers
3004
Price Chg %Chg 1 Day
Range: 1 Day
  • 1 Day
  • 5 Days
  • 1 Month
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Dow
/quotes/zigman/627449/realtime 16,528 -115 0.69%
Nasdaq
/quotes/zigman/12633936/realtime 4,777 -52 1.07%
S&P 500
/quotes/zigman/3870025/realtime 1,972 -17 0.84%
GlobalDow
/quotes/zigman/629063/realtime 2,354 0 0.01%
Gold
/quotes/zigman/662444/delayed 1,141 +8 0.74%
Oil
/quotes/zigman/2331095/delayed 47.47 -1.73 3.52%
FTSE 100
/quotes/zigman/3173262/delayed 6,248 +56 0.90%
DAX
/quotes/zigman/2380246/delayed 10,259 -39 0.38%
CAC 40
/quotes/zigman/3173214/delayed 4,653 -22 0.47%
FTSE MIB
/quotes/zigman/1482176/delayed 21,942 -52 0.24%
IBEX 35
/quotes/zigman/2759620/delayed 10,259 -94 0.91%
Stoxx 600
/quotes/zigman/2380150/delayed 363 0 0.13%
Asia Dow
/quotes/zigman/6959860/realtime 2,762 -22 0.80%
Nikkei 225
/quotes/zigman/5986735/delayed 18,661 -229 1.21%
Hang Seng
/quotes/zigman/2622475/delayed 21,693 +22 0.10%
Shanghai
/quotes/zigman/1859015/delayed 3,206 -26 0.82%
Sensex
/quotes/zigman/1652085/delayed 26,283 -109 0.41%
Singapore
/quotes/zigman/1709939/delayed 2,923 +2 0.07%
Euro
/quotes/zigman/16008136/realtime/sampled 1.13 +0.00 0.37%
Yen
/quotes/zigman/16008150/realtime/sampled 120.93 -0.30 0.25%
Pound
/quotes/zigman/16008140/realtime/sampled 1.54 +0.00 0.23%
Australia$
/quotes/zigman/16008115/realtime/sampled 0.71 0.00 0.00%
DXY Index
/quotes/zigman/1652083/delayed 95.67 -0.25 0.26%
WSJ $ Idx
/quotes/zigman/41508961/realtime 88.25 -0.18 0.21%
U.S. 10yr
/quotes/zigman/15866666/realtime 2.20 -0.02 0.68%
German 10y
/quotes/zigman/15866409/realtime 0.73 -0.01 1.33%
Italy 10yr
/quotes/zigman/15866497/realtime 1.92 +0.01 0.45%
Spain 10yr
/quotes/zigman/15866444/realtime 2.06 0.00 0.19%
U.K. 10yr
/quotes/zigman/15866328/realtime 1.85 -0.02 0.96%
Japan 10yr
/quotes/zigman/15866525/realtime 0.39 +0.01 3.44%
Crude Oil
/quotes/zigman/2331095/delayed 47 -2 3.52%
Gold
/quotes/zigman/662444/delayed 1,141 +8 0.74%
Corn
/quotes/zigman/7599553/delayed 373 -3 0.73%
DJIA F
/quotes/zigman/38649152/delayed 16,285 -223 1.35%
S&P F
/quotes/zigman/30356461/delayed 1,940 -29 1.50%
Silver
/quotes/zigman/3134148/delayed 15 +0 0.61%

Quotes

Symbol Price Change % Change
FB /quotes/zigman/9962609/composite 89.43 -1.58 -1.74%
AAPL /quotes/zigman/68270/composite 112.76 -0.53 -0.47%
GOOG /quotes/zigman/30194416/composite 618.25 -12.13 -1.92%
BAC /quotes/zigman/190927/composite 16.34 -0.02 -0.12%
C /quotes/zigman/5065548/composite 53.48 0.20 0.38%
F /quotes/zigman/264304/composite 13.87 0.13 0.95%
T /quotes/zigman/398198/composite 33.20 -0.09 -0.27%
BP /quotes/zigman/247026/composite 33.54 0.28 0.84%
GE /quotes/zigman/227468/composite 24.82 -0.34 -1.35%
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Rates »

5 yr CD
1.5%
2 yr CD
0.8%
1 yr CD
0.6%
MMA $10K+
0.3%
MMA $50K+
0.4%

National averages from Bankrate.com

You Don’t Need Another Credit Card, You Need A Better One.
Avg. APR Last Week 6 Months
Low Interest 11.62% 11.62% 11.53%
Business 12.85% 12.85% 12.85%
Student 13.14% 13.14% 13.14%
Balance Transfer 14.12% 14.12% 14.00%
Airline 15.10% 15.10% 15.15%
Reward 15.14% 15.14% 14.99%
Cash Back 15.27% 15.27% 15.26%
Instant Approval 18.00% 18.00% 17.93%
Bad Credit 22.73% 22.73% 22.48%
Source:CreditCards.com

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Encore
A blog about living in and planning for retirement

A New Way to Budget in Retirement?

As a result of the shift from defined benefit plans to 401(k)s, baby boomers will be the first generation that must decide how much of their savings to spend each year in retirement. They need a strategy that best balances the risk of outliving their wealth against the cost of unnecessarily restricting their consumption.It is a tricky calculation; boomers need some relatively simple rules of thumb. A recent paper from the Center for Retirement Research at Boston College suggests that the Internal Revenue Service’s rules for required minimum distributions (RMDs) for 401(k) and IRA balances might serve as a reasonable guide. The paper shows that the RMD approach stacks up pretty well against the traditional rules of thumb.

Joe Belanger / Shutterstock.com

Up until now, the three most common rules of thumb have been relying on the income produced by the assets, calculating withdrawals based on life expectancy and adopting the so-called 4% rule. Each has significant problems.

Using interest only can work for wealthy individuals but has serious drawbacks for people who lack substantial retirement savings. One disadvantage is that people die with their initial assets intact, which may be fine for those who want to leave a bequest, but in other cases unnecessarily restricts retirement consumption. Another drawback is that the desire for income may lead retirees to over invest in high-dividend stocks, losing the benefits of portfolio diversification.

Basing withdrawals on life expectancy has two significant drawbacks. First, the calculation involves applying a sophisticated equation, which may be beyond the capacity of many. Second, retirees face a high probability — a 50% chance — that they will outlive their savings.

Under the 4% rule, the retiree each year withdraws 4% of the initial balance. The advantage is that the retiree has a low probability of running out of money. The downside is that such a rule does not permit retirees to periodically adjust consumption in response to investment returns. For example, if returns are less than expected, the retiree should respond by reducing consumption to preserve the assets — a fixed 4% withdrawal is not consistent with such flexibility.

An alternative strategy is to base withdrawals on the RMD rules, which the IRS requires when individuals reach age 701Ž2 and each year thereafter. The IRS makes no claim that the RMD, which is designed to recoup deferred taxes, is the basis of an optimal draw-down strategy. Yet an RMD approach satisfies four important tests of a good strategy. First, like other rules of thumb, it is easy to follow. The IRS stipulates withdrawal percentages based on tables of life expectancies. A withdrawal schedule at younger ages — percent of assets withdrawn, by age — can be based on the same life tables used for the RMD rules. Second, it allows the percentage of remaining wealth consumed each year to increase with age, as the retiree’s remaining life expectancy decreases. Third, as consumption is not restricted to income, the household is less likely to chase dividends and is more likely to have a balanced portfolio. Fourth,consumption responds to fluctuations in the market value of the financial assets, because the dollar amount of the drawdown is based on the portfolio’s current market value.

To determine which real-world strategy would produce the best possible outcome, the paper compares the various rules of thumb, including the RMD approach, with an optimal wealth draw-down strategy. The results show that the RMD approach does about as well as the other strategies and actually outperforms the 4% rule. Given that it also has the four desirable characteristics described above, the RMD approach should be viewed as an alternative viable strategy.

Alicia Munnell, the director of the Center for Retirement Research at Boston College, is a weekly contributor to “Encore.”

 

 

Comments

We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comments (5 of 5)

View all Comments »
    • Its easy to calculate your cash flow when you are receiving your mandated disbursements from 401k holdings using the payout formula that is adjusted every as you age. Its also hard to belive that retired seniors do not have this financial ability and have to rely on someone that is obviously just a salesperson mining for the seniors assets and commissions.

    • Talk to a professional! My small company uses a third party administrator that we have had a relationship with for years. The proactive advice and guidance has been very helpful. I can always use them as a resource when planning for my retirement. The knowledgeable representatives at Steidle Pension Solutions are very quick to respond to my many questions.

    • Good article in general, but I’ve never heard anyone advocate for a rigidly fixed 4% rule. That plan is almost always accompanied by advice to monitor your investment results annually, just like you should have been doing all the way along. You can see pretty quickly whether your accounts are still growing strongly, even with your withdrawals, or shrinking instead. You don’t want to adjust your spending up and down wildly every year with the market’s gyrations, but you should be aware enough to see the trends, and adjust as needed.

    • While I agree with the author that using RMD factors can provide better retirement income budgets than the 4% rule, an “interest only” strategy, and a spend to life expectancy strategy, none of these are very good strategies at all, for the following reasons:

      1. Ignoring Pattern of Income Needs – all of these strategies start with the income, and assume that you can then back into a reasonable spending pattern that can match these income levels. This is backwards from how the process should work – you need to first start with your income needs at different phases of your retirement, and develop a sound strategy that will provide the income when you need it.

      2. Ignores Financial Behavior – the RMD approach as outlined in the article suggest that two individuals with the same amount of money saved and same age should plan on spending the same amount in their first year of retirement. However, this ignores some important behavioral differences that would otherwise lead you do a different conclusion. For example, what would you do if your investment portfolio dropped 30%? Would you move your portfolio toward cash? Would you reduce spending? Can you sit tight and ride it out? Your answer to this question should direct you to a different level of spending based upon your answer.

      3. Expensive Longevity Risk Mitigation – while it is true that you will never run out of money if you follow the RMD approach, you will most certainly end up not generating income that would be anywhere close to where you could if you incorporated some form of an annuitized solution. “Self annuitization” strategies are extremely inefficient (see my blog post on this point here http://bit.ly/N0BQSv)

      There are much better ways to create portfolio strategies that generate better income levels and that are better suited to meet your income needs for years to come.

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.

MarketWatch - Stock Market Quotes, Business News, Financial News
Bulletin
Investor Alert

Tokyo Markets Close in:

need to know
All 10 S&P 500 sectors decline in August
Apple will let iPhone and iPad users block ads
J.C. Penney upgraded by Deutsche Bank
Wal-Mart cuts worker hours at some stores
5 silly new words in the Oxford dictionary

Personal beliefs don’t belong in retirement accounts

Unlucky lottery winner gets IOU from Illinois

Ode to that legendary New York steakhouse the Palm

When you absolutely, positively need a cocktail

Teacher with 111 tardies puts blame on breakfast

Automat concept is back — with a lot more quinoa

If Donald Trump can do it, why not Kanye West?

Scott Walker's backers seek a reboot of his campaign
Scott Walker’s backers seek reboot of campaign
Scott Walker wants a wall — with Canada

Dissatisfied voters are fueling Sanders and Trump
Clinton says she supports ‘revolving door’ bill
Biden a tougher matchup than Clinton: poll

Ruling in ‘Deflategate’ expected by end of this week
Greedy owners are NFL preseason winners

Disney to unveil ‘Star Wars’ toys in unboxing event
Walt Disney leads Dow's losers for August

How teen clothing retailers compete today

Sunday is Warren Buffett's 85th birthday
Happy 85th birthday to the $67 billion man


Why BlackBerry is a more attractive buyout target than Twitter
BlackBerry is a better buyout target than Twitter
Twitter's stock jumps after analyst upgrade

Our kids aren’t doomed to be poorer than we are

Now is the time to fix your investment portfolio
Now is the time to fix your investment portfolio
Both worry, be happy stocks aren’t a sure bet

Facebook users flood Mark Zuckerberg with thank you’s
Facebook users flood Mark Zuckerberg with thanks

‘War Room’ is a ‘resounding success’ at box office

By this measure, stocks have weathered the worst
By this measure, stocks have weathered the worst

Cheeseburgers and happiness always on the menu for Warren Buffett — and Jimmy Buffett, too
Farrell: Recipes for happiness, from Buffett and others

/conga/frontpage.html 353759

Markets »

141.44MDow Volume:
Avg Vol: 109.98M
Unchanged
217
Decliners
3378
Advancers
3004
Price Chg %Chg 1 Day
Range: 1 Day
  • 1 Day
  • 5 Days
  • 1 Month
  • 3 Months
  • 6 Months
  • 1 Year
  • 2 Years
Dow
/quotes/zigman/627449/realtime 16,528 -115 0.69%
Nasdaq
/quotes/zigman/12633936/realtime 4,777 -52 1.07%
S&P 500
/quotes/zigman/3870025/realtime 1,972 -17 0.84%
GlobalDow
/quotes/zigman/629063/realtime 2,354 0 0.01%
Gold
/quotes/zigman/662444/delayed 1,141 +8 0.74%
Oil
/quotes/zigman/2331095/delayed 47.47 -1.73 3.52%
FTSE 100
/quotes/zigman/3173262/delayed 6,248 +56 0.90%
DAX
/quotes/zigman/2380246/delayed 10,259 -39 0.38%
CAC 40
/quotes/zigman/3173214/delayed 4,653 -22 0.47%
FTSE MIB
/quotes/zigman/1482176/delayed 21,942 -52 0.24%
IBEX 35
/quotes/zigman/2759620/delayed 10,259 -94 0.91%
Stoxx 600
/quotes/zigman/2380150/delayed 363 0 0.13%
Asia Dow
/quotes/zigman/6959860/realtime 2,762 -22 0.80%
Nikkei 225
/quotes/zigman/5986735/delayed 18,661 -229 1.21%
Hang Seng
/quotes/zigman/2622475/delayed 21,693 +22 0.10%
Shanghai
/quotes/zigman/1859015/delayed 3,206 -26 0.82%
Sensex
/quotes/zigman/1652085/delayed 26,283 -109 0.41%
Singapore
/quotes/zigman/1709939/delayed 2,923 +2 0.07%
Euro
/quotes/zigman/16008136/realtime/sampled 1.13 +0.00 0.37%
Yen
/quotes/zigman/16008150/realtime/sampled 120.93 -0.30 0.24%
Pound
/quotes/zigman/16008140/realtime/sampled 1.54 +0.00 0.23%
Australia$
/quotes/zigman/16008115/realtime/sampled 0.71 0.00 0.00%
DXY Index
/quotes/zigman/1652083/delayed 95.67 -0.25 0.26%
WSJ $ Idx
/quotes/zigman/41508961/realtime 88.25 -0.18 0.21%
U.S. 10yr
/quotes/zigman/15866666/realtime 2.20 -0.02 0.68%
German 10y
/quotes/zigman/15866409/realtime 0.73 -0.01 1.33%
Italy 10yr
/quotes/zigman/15866497/realtime 1.92 +0.01 0.45%
Spain 10yr
/quotes/zigman/15866444/realtime 2.06 0.00 0.19%
U.K. 10yr
/quotes/zigman/15866328/realtime 1.85 -0.02 0.96%
Japan 10yr
/quotes/zigman/15866525/realtime 0.39 +0.01 3.44%
Crude Oil
/quotes/zigman/2331095/delayed 47 -2 3.52%
Gold
/quotes/zigman/662444/delayed 1,141 +8 0.74%
Corn
/quotes/zigman/7599553/delayed 373 -3 0.73%
DJIA F
/quotes/zigman/38649152/delayed 16,285 -223 1.35%
S&P F
/quotes/zigman/30356461/delayed 1,940 -29 1.50%
Silver
/quotes/zigman/3134148/delayed 15 +0 0.61%

Quotes

Symbol Price Change % Change
FB /quotes/zigman/9962609/composite 89.43 -1.58 -1.74%
AAPL /quotes/zigman/68270/composite 112.76 -0.53 -0.47%
GOOG /quotes/zigman/30194416/composite 618.25 -12.13 -1.92%
BAC /quotes/zigman/190927/composite 16.34 -0.02 -0.12%
C /quotes/zigman/5065548/composite 53.48 0.20 0.38%
F /quotes/zigman/264304/composite 13.87 0.13 0.95%
T /quotes/zigman/398198/composite 33.20 -0.09 -0.27%
BP /quotes/zigman/247026/composite 33.54 0.28 0.84%
GE /quotes/zigman/227468/composite 24.82 -0.34 -1.35%
Visit the quote page and your most recently viewed stocks will automatically be displayed here.
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Rates »

5 yr CD
1.5%
2 yr CD
0.8%
1 yr CD
0.6%
MMA $10K+
0.3%
MMA $50K+
0.4%

National averages from Bankrate.com

You Don’t Need Another Credit Card, You Need A Better One.
Avg. APR Last Week 6 Months
Low Interest 11.62% 11.62% 11.53%
Business 12.85% 12.85% 12.85%
Student 13.14% 13.14% 13.14%
Balance Transfer 14.12% 14.12% 14.00%
Airline 15.10% 15.10% 15.15%
Reward 15.14% 15.14% 14.99%
Cash Back 15.27% 15.27% 15.26%
Instant Approval 18.00% 18.00% 17.93%
Bad Credit 22.73% 22.73% 22.48%
Source:CreditCards.com

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