This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Why Retirees May Need to Tighten Their Belts

NEW YORK ( TheStreet) -- Retirees have long struggled with a difficult question: How much can you spend annually without going broke? Financial advisors have suggested that typical investors can start by spending about 4% of their assets annually. So an investor with $1 million can withdraw $40,000 the first year. After that, retirees can raise their annual payouts along with the inflation rate. But in recent years, advisors have begun to question the traditional advice. Now some researchers suggest withdrawal rates of less than 3%.

Retirees should tighten their belts because of current market conditions, says David Blanchett, head of retirement research for Morningstar Investment Management. He says that many investors should only withdraw 2.7%. Blanchett says that earlier studies of withdrawal rates assumed that markets would deliver the same returns in the future as they had done in the past. But there are now good reasons to think that returns in the next decade will be subpar.

Blanchett estimated that intermediate government bonds will return 1.8% annually in the next decade, compared to the long-term figure of 5.5%. The reason for the gloomy outlook is that bond yields are currently low. Yields account for nearly all the returns produced by bonds. So when yields are low, returns are skimpy. Blanchett did his calculations in December 2012 when the yield on 10-year Treasuries was 1.8%. Today the 10-year Treasury yields 2.7%. The higher yield should help returns, but the 10-year outlook remains well below the historical average.

From 1926 through 2011, the S&P 500 returned 11.8% annually, according to Ibbotson Associates. It is possible that stocks will continue the double-digit pace, but Blanchett says that markets have often delivered much smaller returns. To be on the safe side, he assumes that stocks will return 9.8% annually. Using that forecast, a retiree who has 60% of assets in equities and 40% in bonds could be in danger of exhausting assets. If the retiree uses a withdrawal rate of 4.3%, there is a 50% chance of spending all the money in 30 years. By lowering the withdrawal rate to 2.4%, the retiree has a 95% chance of avoiding bankruptcy over 30 years.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $118.03 0.00%
FB $105.41 0.00%
GOOG $748.15 0.00%
TSLA $229.64 0.00%
YHOO $33.16 0.00%


Chart of I:DJI
DOW 17,813.39 +1.20 0.01%
S&P 500 2,088.87 -0.27 -0.01%
NASDAQ 5,116.1430 +13.3350 0.26%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs