How Long Will Your Money Last?

Running out of money is the number one concern of retirees. The probability of that occurring, and figuring out how much is needed to retire in the first place, has turned into a national past-time with the oncoming so-called "gray tsunami" of retiring baby boomers. At least it has for about 50% of the workforce. Apparently the other half is going to wing it. In any event, there is a neat little calculator for those seeking a ball-park estimate to this question produced by FIRECalc that DIY Investor came across at Free Money Finance.

This calculator starts out very simply and requires a portfolio amount and an assumed spending amount as shown:

Source:FIRECalc

 DIY Investor put in the portfolio amount of $1,000,000 and a spending level of $40,000 to test the 4% rule of thumb. Upon clicking "submit," FIRECalc returns a series of paths graphically. The result is that spending 4% on an inflation-adjusted basis would have been successful, i.e. the retiree would not have run out of money, 94.6% of the time based on 111,  30-year periods .

Just this simple step used in conjunction with expected Social Security, and maybe a possible pension, can start to give a retiree a good idea if his or her nest egg is close to being able to produce the desired income. The FIRECalc tool allows for more sophistication, as well, for those wanting to put in their own assumptions. Just click the tabs on the home page:

CLICK TO ENLARGE 

Callan Periodic Table of Investment Returns - a Resource

Source: Callan Associates

The graphic on the left shows two columns of  "The Callan Periodic Table of Investment Returns."  Click to enlarge and, better yet, use the link to study the whole table. The table shows 20 years of performance for 9 different market sectors. These are:

Domestic Equity: S&P 500, S&P/Citi 500 Value, S&P/Citi 500 Growth, Russell 2000, Russell 2000 Value, Russell 2000 Growth

International: MSCI EAFE, MSCI Emerging Markets

Bonds: Barclay's Capital Aggregate Bond Index

In the table, investment returns for each year are ranked with the best performing sector at the top and the worst performing sector at the bottom. Each sector is color-coded with its return shown in a box. As shown, for example, in the column on the left, the best performing sector in 2010 was "Russell 2000/Growth at + 29.09%. The worst performing sector was "BC AGG," the bond market index, with a return of +6.54%.

It is difficult to over emphasize the usefulness of the table. For example, when DIY Investor is interested in seeing how the bond market performed, on a relative basis, over the past 20 years, he can pull up the chart and, by scanning horizontally, follow the gray boxes. DIY Investor quickly notes that bonds were the top performing sector in 2 years (2002 and 2008) out of the last 20 years. These, of course, were two big down years for stocks, and bonds provided much needed negative correlation.

One of the points shown in the table is the importance of sector diversification. This is reflected in the quilt-like pattern of the colors. Performance by sector jumps around . A second important point is that chasing hot sectors, which many investors apparently cannot refrain from, can be hazardous to your financial health. Frequently,  top-performing sectors fall towards the bottom in subsequent years.

In addition to these usual points, one that is often overlooked should be considered and thought about. That is that the actual returns themselves are useful in thinking about risk tolerance. Focus on the return over the past 20 years of the S&P 500. Notice from 1995 - 1996 that the lowest annual return was 22.96%. Over the next 20 years, we very well could get a similar return. Investors will drive prices sky high, earnings will consistently come in higher than expected, the investment world will convince itself that "the world has changed" and value  metrics no longer matter. The important point is how will you react?  Will you abandon plan and pile in to the "hot sector"?

Notice in the table that the S&P 500 was down more than 20% on two occasions. Again, this very likely will occur going forward. Don't be surprised. Think through strategy and likely responses when seas are calm - that's all DIY Investor is saying. All of this emphasizes, of course, the value of having a well-thought out plan. It goes without saying, as well,  that there likely will be a period during the next 20 years that is unlike anything we've seen before. But this is what makes it fun.

You should also read page 2 of the Callan report and some of the interesting points it makes about the table.

Two Investment Resources the DIY Investor Should Know

One of the very best ways to follow personal blogs is through weekend reading lists. Bloggers take the time to list interesting blogs of the week, usually with a short summary, making it easy to find posts that you might want to read. A good example is Dividend Monk's "Weekend Reading." This is resource #1.

In Dividend Monk's list this week is the "Dividend Calendar" from the "I Love Dividends" site. This second resource lists companies expected to pay dividends each month. For example, if you need income in August- you might want to pick from the following:
AOD
ATT
AXP
Clorox
Costco
DNP
FAX
Gen. Mills
KinderMorgan
NRF
PG
Pimco
RealtyInc
SBR
T
UTG
Verizon
WPO

Notice that some companies are listed by ticker symbol and that they link to their Yahoo! Finance site, making it especially easy to check their dividend-paying record and yield. To me, this is similar to the popular bond ladders that investors like to create.

My readers know that I prefer low cost funds. I do, however, recognize that there is more than one way to skin a cat and that some investors have the time, know-how, and resources to pick individual stocks (especially those who are retired and need income).

Disclosure: This post is intended as a reference only. Investors should do their own research and consult professional advice pertaining to their specific situation.