Financial Expert: Draft 'Withdrawal Policy' for Retirement

Monday, 05 May 2014 05:12 PM

By Joe Battaglia

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With the life expectancy growing longer and the stock market more prone to volatility, one financial expert believes retirees might want to consider drafting a Withdrawal Policy Statement as a way to ensure they will not outlive their retirement nest eggs.

David Scranton, founder and CEO of Advisors' Academy and the author of "Stop the Financial Insanity: How to Keep Wall Street's Cancer from Spreading to Your Portfolio," told J.D. Hayworth on "America's Forum" on Newsmax TV that a WPS could be "a great thing to have."

Story continues below video.

"We had a rule in 1990 saying you could withdraw 5 percent per year of your asset base, and you probably would never run out of money," Scranton explained.

Editor’s Note: Retire 10 Years Earlier With These 4 Stocks

"The year 2000 hit, the tech bubble burst, and a lot of people who thought they could take 5 percent per year safely, and it didn't come to fruition, they've depleted a lot of principal.

"Then the rule dropped to 4 percent, and recently we even had seen studies using Monte Carlo analysis, which is back testing in statistical analysis, that even somebody has what's traditionally considered a conservative portfolio, only 40 percent in the stock market, even with that level of conservatism with people living longer and longer, there's still about a 20 percent chance that one could outlive their money taking only 4 percent a year."

Scranton said the three main goals of a WPS are to set a series of parameters and guidelines about how retirement withdrawals will be funded from the portfolio; to clarify how to respond when a market calamity strikes; and to determine, in advance, what steps will be taken to keep the retirement plan on track.

"The basic premise is that the more risk you take in your portfolio, in other words the more you invest for growth in things like stocks or stock mutual funds instead of income, the lower the percentage that you can safely take annually," Scranton said. "If you invest more conservatively in things that are designed to generate interest or dividends instead of growth, then as a general rule, you could take a slightly higher percentage and feel comfortable that you will not outlive your income."

Scranton said that the most important years to avoid taking great risks in their portfolio are the 10 years immediately prior to retirement.

"It's something called sequence of returns, and that's where, unfortunately, people who are planning to retire now, they've gotten hurt over the last 10 years, and people who retired 10 years ago might be in even more trouble," Scranton said.

"So I would say if someone's planning to retire in a 10-year time horizon, again hypothetically speaking, you have to realize that the last two times the market took a 50 percent or so drop in recovery since the turn of the century. It took about seven years for the drop to occur and then for the recovery. Seven years from peak to peak, so I would say that that person statistically probably only has three more years where they can afford to take risk and then they at least at that point they've got to kick the risk down a notch in their portfolio."

Editor’s Note: Retire 10 Years Earlier With These 4 Stocks

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