, Newburyport, MA


November 1, 2011

Stop worrying, begin to love volatility


Another way to increase predictable permanent income is through the use of annuities, either immediate or deferred. Despite what you may think, annuities, if sold and used properly, can deliver both income and peace of mind.

For the income you may rely on from your bank accounts or your investments, be very cautious of two percentages, which can literally make or break your retirement dreams. Modify your expectations of investment growth and carefully manage your withdrawal rate. The new normal for investment growth is an average annual 5 percent, maybe 6 percent, over 10- to 15-year periods. If you expect or demand more, your disappointments will rise in direct correlation with the additional risk you may be taking. Disappointments lead to anxiety and loss of sleep. Not what retirement's supposed to be about.

In terms of withdrawal rate and the life expectancy of your investments, the common rule of thumb is to withdraw no more than 4 percent in the first year of distribution and adjust for inflation each year thereafter. Calibrating the withdrawal rate to give you maximum income without risk to your restfulness is critical. That calibration, which requires discipline and skill, needs to take taxation, as well, into consideration.

The final consideration in improving our mental well-being on the verge of or during retirement in these volatile times is to think "reasonably predictable income stream" over time. What is a reasonably predictable stream of income from our investments and for how long? We want our retirement savings to last at least as long as we do.

The "reasonably predictable income stream" is a mind-set completely different from the pre-retirement idea of accumulating accounts as big as possible. In the retirement phase the size of the pile is less important than the duration of the pile. Ideally, the pile's done the day we die, assuming we are not motivated to enrich our heirs.

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