Critical Mass - Care and Feeding For Once Attained: Re: Mutual Funds

» bob90245 - Re: Mutual Funds

In response to Mutual Funds posted by Normxxx:

If you start with a nest egg of $500,000, this portfolio will enable you to generate a significant stream of income— an inflation-adjusted $27,500 annually for at least 20 years, and probably more.

This is too aggressive for two reasons. First, the initial withdrawal rate is 5.5% ( $27,500 / $500,000 ). And second, the time frame is too short. A 65 year old should plan for 30 more years in retirement. I have family members who are over 90 years old and still going strong!

The behavior of this portfolio is a lesson in caution: It may not eke out the total return of 8.5% this year required to allow you to draw out $27,500 and still have your original $500,000, plus an extra 3% to match the inflation rate.

This is the third reason to lower the initial withdrawal rate to something closer to 4%. While the author's widely diversified portfolio will reduce volatility, nevertheless, a stretch of poor returns early in retirement could force depleting principal at a faster rate than expected. The resulting portfolio shrinkage may damage the chance of catching up later even if there is a stretch of above average returns down the road.

-- posted by bob90245