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Newly retired? You might want to suspend your 'raises'

Posted by Cheryl Costa  August 22, 2008 09:02 AM

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Previously in this blog, I have talked about the 4 percent safe withdrawal. Four percent of the original account balance, adjusted in future years for inflation, is the amount that most retirees can safely withdraw from their portfolio without being too worried about running out of money in retirement. As I've mentioned, the 4 percent rate has a high probability of success, but it is not a guarantee.

Many factors influence how long a retirement portfolio will last. It makes sense to most of us that overall return is an important factor, but perhaps what is not as clear is the importance of the TIMING of the returns. Studies have shown that a few years of poor returns right at the beginning of retirement can have a big impact on the overall sustainability of the portfolio.

A recent New York Times article does a great job of explaining how a retirement portfolio can be affected by a string of "bad" years at the beginning of retirement. Specifically, it shows that if a person retires at the start of a bear market and they make no changes to their spending habits, a 4 percent withdrawal rate could fail them a third of the time or more.

Fortunately, most retirees are willing to make adjustments when the market takes a turn for the worse. The best option involves returning to employment. If you can turn off your withdrawals by earning income instead, that is the optimal solution. However, that is probably not a option for most people. And, fortunately, it also probably not necessary. Less drastic changes, like temporarily reducing your withdrawals, improves your chances quite a bit. Even keeping the withdrawals constant for a few years and simply not taking an inflation adjustment can go a long way.

So what's the take-away here? If you retire at a time when the market is performing poorly, it is not the end of the world, but you have to be more careful than someone who retires at the beginning of a tremendous bull market. If you are newly retired, you don't have to start living on macaroni and cheese but you do need to keep an eye on expenses. If you can possibly return to work, even on a part time basis, you will probably be just fine. If you can't or don't want to return to the working world, consider reducing your withdrawals for a couple of years. Whatever you do, don't panic and move to an all cash or all bond portfolio. You really need to keep a healthy allocation to equity mutual funds if you want your portfolio to keep up with inflation and last for 20 or 30 years. Finally, remember that 4 percent is a general guideline. Higher or lower withdrawal rates are definitely possible/necessary depending on your personal circumstances.

This blog is not written or edited by or the Boston Globe.
The author is solely responsible for the content.

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Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.

About the contributors

D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit
Financial Planning Association™ of Massachusetts has 900 members who specialize in the financial planning process. Many of its members engage in philanthropic pro bono work in their communities, recommend legislation, elevate public awareness, promote financial literacy, and advocate for sound economic and tax policies.
Odysseas Papadimitriou is the founder of, a credit card and gift card marketplace, and, a personal finance site. He has more than 13 years of experience in the personal finance industry, and previously served as senior director at Capital One.

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