When all is said and done, the single most critical judgment I am called upon to help my clients make is the rate of portfolio withdrawal that will maximize their retirement experience while still providing enough tangible visibility for them to anticipate a lifetime of security, however long that may be.

Traditional approaches to this question involve a set of calculations with respect to the portfolio, which precipitates an appropriate withdrawal figure. In effect, whether the models use Monte Carlo simulations or average rates of return, they say to the client: "You have accumulated this much money, which will permit you to spend so much each year. Have a nice life." I have some technical misgivings with each of these approaches, but more importantly, I think there is a more human, more client-respecting way to go about this difficult and critical task.

I like to begin not with the portfolio, but with the client's lifestyle goals, then see if we can develop a portfolio and a plan for withdrawals that will meet those needs with sufficient certainty.

Real Answers For Real People

Tom and Beverly Stone will retire in January 2001 at age 65. They have accumulated $1.5 million. Except for Social Security benefits, they have no other visible means of support for the uncertain number of years that stretch out before them. We have worked out a retirement spending plan with the Stones that will require an annual cash outlay of $110,000, including their tax obligations. This defines the lifestyle to which they are looking forward. Social Security will chip in about $20,000, and their nest egg has to provide the rest.

Like most of the people I work with who are approaching retirement, Tom and Beverly articulate their main financial goal this way: "We want to maintain our current lifestyle for as long as we live without having to worry about money." What they do not have as a goal is to die with a nest egg that has the same buying power it has today. Leaving money to their children would be nice, they say, but it is not what they would call a goal.

We explained to the Stones that there are two unknowns that make retirement planning complicated. The first, of course, is that we do not know any particular client's life expectancy. I often joke with prospective retirees that if they would just tell me the date of their expected demise, I could draft an absolutely perfect plan. So far, no client has wanted a perfect plan badly enough to commit to an expiration date for his tenure on the planet. So, we must work around this significant unknown. The most accepted approach is to plan so assets will last for some finite period beyond a statistical life expectancy or beyond a statistical life expectancy modified by family history.

A 65-year-old has an actuarial life expectancy of something less than 20 years. The Stones' ancestors have consistently not done as well. So, we agreed that planning for, say, age 90 should be quite conservative. "If we're still kicking at 90, let the kids take over," Bev said playfully.

The second unknown, of course, is the future returns from a diversified investment portfolio.

A decade ago, the standard way of coping with investment uncertainties was to make projections based on the historical average returns for stocks and bonds, blended in whatever proportions the advisor and client considered appropriate. The obvious risk of this approach is that a client could start retirement at the commencement of an extended period of subnormal investment returns. If his or her withdrawals were based on the more optimistic historical average returns, by the time the markets got their energy back, the nest egg would already be significantly depleted and the client would be contemplating a steady diet of peanut butter.

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