Q. When is it safe to discard the various computer-based income projections often used in financial planning, such as the commonly used Monte Carlo studies? When can you use real countable dollar amounts for living in retirement? My wife is 56. I’m 60. So we are in the retirement "red zone." We have $3 million in tax-free bonds and $1 million in taxable equities.
A. With a joint life expectancy (meaning one of you will live at least this long) of 25 or more years, there really is no way to be certain about the future. If your savings were all in tax-deferred accounts, you could invest in Treasury Inflation Protected Securities (TIPS) that matured at regular intervals during the next 30 years. This method is recommended by Zvi Bodie, a professor of finance at Boston University.
If you did this and assumed no real return, your inflation-adjusted income would be at least $133,333 a year. With a real return of 1 to 2 percent, your actual lifetime income would be somewhat higher. Either way, your income wouldn't be $250,000 a year. That amounts to a 6.3 percent return on your savings.
Another way to do this is to annuitize your assets, giving your assets to an insurance company in exchange for a promise that the company will deliver you and your spouse a lifetime income as long as one of you is still alive. Going to www.immediateannuities.com, I found that a couple your age with $4 million could get a lifetime annuity income of $21,195 a month, or $254,340 a year. Unfortunately, that income isn't adjusted for inflation, so your purchasing power would start declining immediately.
Over the last 25 years the annualized rate of inflation has been about 3 percent. If it continued at that rate, your purchasing power would be cut in half over the next 25 years.
You'd also have to trust the insurance company would be around to make the payments. Twenty-five or 30 years is a long time.
So what do you do?
First, you accept that life is uncertain. If you've lived and adapted this long, you'll probably manage to adapt another 25 or 30 years, too. Second, you diversify as much as possible--- and diversifying means including life annuities as part of your retirement portfolio. Third, if you insist on $250,000 of income, you accept the idea that your income may decline at a later date as your withdrawals outrun your investment returns. This would not be a fate worse than death: Research supports the idea that most of us consume less after age 75 than we do when we are younger.
Q. I have been reading Harry Dent's book THE GREAT DEPRESSION AHEAD. He has some very dire predictions along with possible opportunities. I wonder how anyone can have this kind of view of future events in the economy? Do you have an opinion, and do you see any validity to his view of the future? ---S. C., by email from Corpus Christi
A. It is easier, today, to project a dismal future than at any time in the last 40 or 50 years. But demography, which is Mr. Dent's specialty, isn't always destiny. The future could be a lot brighter than the current public mood. I keep a copy of "The Great Depression of 1990" by Dr. Ravi Batra in my library. I keep it right next to "Dow 36,000," the manic 1999 book by James K. Glassman and Kevin A. Hassett asserting that stocks were massively undervalued. Dramatic predictions are as common as their inaccuracy.
We don't know the future. All we can do is cultivate flexibility, diversify our savings, and share as little of our return as possible with those who claim to know the future.