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Striking a Delicate Balance
When the day comes for you to begin drawing a retirement income, will you know
how much you can withdraw safely from your investment accounts? If you don't
have a withdrawal plan, you may run the risk of taking too much and running out
of money during your lifetime, or being too cautious and living on less income
than you need to maintain your lifestyle.
A systematic withdrawal program may help stretch the life of your accounts to
last for a certain period or even indefinitely, depending on your goals.
Choose Your Variable
A systematic withdrawal plan enables investors to schedule a regular series of
payments (monthly, for example) from an account that is pursuing an investment
return. The most efficient way to draw from the account can be calculated by
striking a balance between certain variables related to the investor's goals.
Principal — Assume that an
investor with a $1 million account is earning a hypothetical 7% annual return.
If the investor wanted to take $100,000 income per year, the principal and
interest would last about 17 years. But if the investor wanted the account to
last longer, he could take less income. To preserve the principal indefinitely,
he could draw $70,000 per year, and theoretically the account balance would
never run out as long as the return was at least 7%. This hypothetical example
is used for illustrative purposes only and does not represent any specific
investment.
Inflation — If inflation
protection is desired, annual withdrawals can be indexed to the inflation rate,
but typically at the expense of other variables, such as a shorter account life
or a lower starting income.
Risk — An account that is being
used for systematic withdrawals should typically be exposed to moderate risk
levels at most. Catastrophic losses could interfere with the account's long-term
ability to produce income. If a greater potential return is desired, an
individual may be able to adjust other variables, such as basing annual
withdrawals on account performance.
Making the most efficient use of the money in an investment account involves
taking stock of personal financial circumstances and goals. Making a careful
calculation before you begin systematically taking money from your investments
may help ensure that your money lasts as long as you do.
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