Q. My question is about the calculation used to determine how much you can withdraw from retirement accounts. I am 68 years old. I have $1 million in deferred retirement accounts. I want to withdraw all the money over a 20-year period (my assumed remaining lifespan). This equates to $50,000 per year or five percent annually, which is more than the often-recommended 4 percent.
If I assume I only have 15 more years to live (a more realistic assumption based upon family history), I could withdraw about $66,600 per year or 6.6 percent annually. How does this compare to all the assumptions, which guide the standard 4 percent "safe" withdrawal rate?
—Frank in Plano, TX
A. The 4 percent withdrawal rate convention is based on the maximum starting withdrawal rate you can have and still be 95 percent certain that your stash will last 30 years while invested in stocks and bonds. Withdraw more and the probability of delivering the required money goes down pretty fast. In your case, you will be 98 years old in 30 years. By that time the probability of being dead is 98 percent, which is the other way to solve the income problem.
That 4 percent starting income figure, however, is based on inflation adjusting the original withdrawal every year, so it can’t be compared to a simple, flat annual withdrawal.
The other problem is the consequence of being wrong about how long you will live. If you pick a departure time 15 years in the future and spend your principal accordingly, not dying timely will cause you great inconvenience.
This is a problem for many readers. They want to make the convenient assumption that they will be among the ones who die early, not among the ones who die late. But here’s the thing about a life expectancy figure: it isn’t how long you will live. A life expectancy figure is the halfway mark in a distribution.
If you read that your life expectancy is, say, 82 years it means that half the people in a large group will die before that age. Half will die later.
There are two other problems with this. First, new research suggests that withdrawal rates need to be much lower today than history indicates because yields are low and stocks are at high valuation levels. Second, if you happen to have a college education and have enjoyed an above average (but not gigantic) income, you’ll probably live five years longer than the broad life expectancy tables suggest.
So I have some suggested reading. Not difficult. Fun, actually. Read W. Somerset Maugham’s short story, “The Lotus Eater.” It can be found on the web, free, with a simple Google search. It is the story of a man who aches to retire. So he takes all his money, buys a term annuity, quits his job and goes to live happily on the island of Capri. The only problem is that he is unwilling to end his life when the term annuity ends.
Q. Is there a risk in using only one brokerage account for my IRA? I'm getting ready to do a rollover from my 403(b) at work to one or more IRAs. I invest primarily in mutual funds and most are index funds. In checking the coverage I found that if a brokerage company like Fidelity or TIAA goes bankrupt, it looks like there is a limit of $500,000 coverage per brokerage? —P.B., by email
A. If you are dealing with the largest and best-known firms— like Fidelity, TIAA-CREF, Schwab or Vanguard— and invest in mutual funds or exchange traded funds, you have virtually no risk. You will have $500,000 of Securities Investor Protection Corporation coverage. You will also have additional private insurance coverage beyond the SIPC’s $500,000.
But there is a more important reason to keep you money at one firm. If you start dividing your money across different firms you increase the odds that you will not understand how your money is invested. You will also increase the odds of making an expensive mistake such as failing to make a required minimum distribution.
What I have learned from reader mail and stories from adult children is that having your assets scattered all over in the pursuit of safety generally leads to expensive problems.