Monday, July 30, 2012

My Retirement Withdrawal Strategy

I don’t believe bonds are safe havens, I shun gold and think CD’s really mean Certificates of Depression. So you may ask, what do you plan to do for retirement? I mean, if you invest in growth stock mutual funds what are you planning to do when you reach retirement age and begin withdrawing money to live on?

Well this is a topic that I am very happy to explore. When investing I am always thinking and planning long term. Every penny invested I plan to leave alone in mutual funds for at least five years. This self imposed rule will continue to be followed leading up to and through retirement. As has become standard practice here at from 0 to $1 million, I will use the most appropriate case study that I can think of: my own.

To help create a gauge I will use the age of 70 as my “retirement” age. Although to clarify, I never see myself ever truly retiring off into the sunset and staying at home all day long. I see retirement as a chance to work part-time teaching, living all over the world and spending time with my family. 70 though is the age in which, if it still exists, Social (In)security can be claimed for the maximum payout. So let’s say then that I plan to file for Social (In)security at 70 and in essence “retire.”

Now my retirement accounts are currently spread across a 401(k) through work and a ROTH IRA, meaning that at 59 ½ I can begin making withdrawals without penalty. As an added bonus with a ROTH there is no required minimum distribution. So at the age of 70 I begin what I will call, “5 year living expense withdrawals.”

I will reiterate here, any money invested in the stock market should not be needed for at least 5 years. So when I plan to begin to live off of my investment income I will withdraw 5 years worth of living expenses at a time. Currently, if I do not invest another single penny into my 401(k) and ROTH IRA, and my mutual funds earn at least a 12% average annualized return, at 70 years of age my retirement accounts will be worth $5,865,308.36.

So to ballpark, let’s say I plan to live on $80,000 a year in retirement, which by the way is 4X greater than what I currently live on. At 70 I will withdraw $400,000 – which leaves the nest egg with $5,465,308.36 to stay invested in the stock market in good growth stock mutual funds. I plan to do nothing fancy with the $400,000 that is withdrawn. No CD’s, no bonds, one idea I have is to take $80,000 and let it sit in my everyday checking account to be budgeted every month, and spread the remaining $320,000 across a few different savings accounts, maybe even across a credit union or two, so that in the event of a “banking collapse” my 5 year & less living expenses will be covered by FDIC insurance.

In 5 more years when I turn 75 and have gone thru my living expenses withdrawn at 70, my retirement nest egg, which was still invested with a value of $5.4 million, will now be worth $9,928,807.67 by my 75th birthday thanks to the power of compound interest. And every 5 years I will shampoo, rinse and repeat J

I don’t really care if Social (In)Security will be there or not when I retire!

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