Watch out for these pitfalls when drawing down your retirement investments.
by. David Ning
After years of saving up for retirement, there will come a time when you need to start spending your nest egg. Drawing down your assets in an appropriate way can be just as crucial to your retirement security as saving and investing. Here are some risks to avoid when spending your retirement savings:
Losses in retirement are especially problematic. You annual returns start to be very important in the years leading up to and immediately after retirement. When you are saving up for retirement, it’s certainly better to get a 15 percent return than a 5 percent return or a loss, but over a 30-year career the returns of a single year won’t make or break your retirement. However, returns make a much bigger difference once you start taking withdrawals from your investments, especially if you experience a decline it the early part of your retirement.
A few big declines in the first few years of retirement on top of yearly withdrawals can deplete your nest egg so much that the remaining portfolio can never recover. For example, consider an investor with 100 percent of his assets invested in the S&P 500 index at the beginning of 2000. If no withdrawals are taken, the investor would have roughly 62 percent of his nest egg at the end of 2002 and fully recover sometime in 2007. However, the recovery is much worse for a retiree withdrawing $50,000 a year. By 2002, just 50 percent of the portfolio is left. And even by 2007 he would only be left with 63 percent of the original amount. And this calculation does not account for taxes. Add a bit of tax costs and the picture is even bleaker.
To avoid significant losses in retirement, many retirees shift their retirement money to more conservative investments that are less likely to lose value. While the growth might be slower, conservative investors are also less likely to suffer a financial setback they don’t have time to recover from.continue reading »