American Investment Services, Inc.

Disciplined, Diversified, & Cost Effective

August 2012 – Spending Down

This month we continue our series on income in retirement. In the following pages we assess reverse mortgages and preferred stocks, and we will assess other sources of income coming months. However, readers should keep in mind that ideally their savings will constitute their primary source of cash flow.

Spending from savings, however, requires discipline. To avoid the risk of depleting their savings prematurely, retirees should formulate spending guidelines to accompany their portfolio allocation plan. Recent research conducted by The Vanguard Group reassessed the “4 percent spending rule”, a widely accepted rule-of-thumb for spending in retirement.

Since 1926 the annual investment income (interest and dividends) from a 50 percent stock/50 percent bond portfolio would have exceeded 4 percent in most years. However, yields have been steadily decreasing over the past 30 years, falling from a peak of 10.2 percent in 1982 to only 2.8 percent in 2011.

Investors willing to spend from capital, however, should take heart. Vanguard assessed a variety of inflation-adjusted spending rates and portfolio allocation plans for investors with differing planning horizons and desired levels of “certainty” regarding portfolio success rates (success being defined as not running out of money prematurely). The table below provides a synopsis.

For example, for a retiree with a 25 year planning horizon and assuming an 85 percent success rate (an 85 percent probability of not depleting the
account before 25 years), an aggressively allocated portfolio would support a 4.5 percent withdrawal rate. A conservative portfolio on the other hand would only support a 4.0 percent withdrawal rate.

This model is useful as a point of reference because it can accommodate different assumptions regarding an investor’s time horizon, portfolio allocation, and chosen success rate. It suggests that the traditional 4 percent rule-of-thumb falls within a range of withdrawal rates that would be reasonable for many retirees.

Also In This Issue:

Reverse Mortgages: Tapping Your Home For Income
Preferred Stock and Your Portfolio
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield
Asset Class Investment Vehicles