How you’re being misled by retirement-saving advice

I suggest you use these tables along with the accompanying discussion, to start figuring out for yourself whether or not you have enough money to retire.

Let’s start with one of the tables to see what we can learn from them. The second table, Table 2, is based on several important assumptions: It’s 1970 and you have just retired with $1 million in your portfolio. You have properly diversified your portfolio to include much more than just the most popular asset classes. You will withdraw $50,000 in your first year of retirement (a 5% withdrawal rate, in other words) and you will increase that amount every year based on actual inflation.

The table has 12 columns of annual portfolio values. Since each year’s distribution is “fixed” by the assumption of $50,000 plus inflation, the only reason the columns have different numbers is that the portfolios are invested differently. On the left is a portfolio entirely in bond funds. On the right is one that’s entirely in the Standard & Poor’s 500 Index SPX, -0.24% The portfolios in between are widely diversified equity funds, with varying percentages of stock funds and bond funds.

When you look at the table you can instantly see that the yearly portfolio values dwindle and disappear in seven of the 12 columns — a majority. The blank white spaces indicate years in which our hypothetical investor ran out of money because the portfolio returns were insufficient to keep up with constantly rising withdrawals.

So here’s one obvious conclusion: A retirement portfolio based on these assumptions needed at least 60% in equities to keep supporting the retiree through 2014. In 2014, the “fixed” distribution was $310,266, only about one-sixth of value of the portfolio at the end of that year. This withdrawal rate couldn’t last very many more years, which means that particular portfolio was approaching extinction.

To support a reasonable expectation of continuing much longer, the portfolio would need to be invested at least 70% in equity funds. And yet, the level of risk in such a portfolio is greater than most retirees can or should take.

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