The Early Bird Catches So Much More

Physician's Money DigestJune30 2004
Volume 11
Issue 12

The one disaster most physician-investorswould like to avoid isrunning out of money in retirement.Everything else pales incomparison to this fear. If you're worriedabout your future, the first piece of theretirement puzzle you should work onsolving is how much you can safely withdraweach year for expenses without outlivingyour portfolio.

Real World Reality

The traditional financial planningassumption about retirement income goessomething like this: You will make 10%on average, withdraw 6% per year, youraccount balance and income will growabout 4% every year, and your childrenwill eventually receive a windfall. Whilethis sounds wonderful in theory, it's abust in the real world.

The problem with the traditionalassumption is that it doesn't account forthe variability of returns in the real world.In addition, average returns count fornothing if your retirement precedes aperiod like the Depression, 1973 to 1974,or 2000 to 2002. The real world is farmore complicated and riskier than anaverage return might indicate.

Time-Tested Tactics

Three business professors from TrinityUniversity in Texas, Philip L. Cooley, CarlM. Hubbard, and Daniel T. Walz, brokenew ground with their paper "RetirementSavings: Choosing a Withdrawal RateThat Is Sustainable." The authors employedhistorical back testing to demonstratethe effects of withdrawal rates, timehorizon, and asset allocation. The resultsof the study revealed that portfolio failurerates are directly related to withdrawalrates and time horizon and are influencedby asset allocation.

The study tracked failure rates againstwithdrawal amounts, using the S&P 500and bonds in various combinations overdifferent time periods. Even in caseswhere there were no taxes, expenses, ortransaction fees and the optimum portfoliowas known in advance, the failure ratewas 6%. The Cooley, Hubbard, and Walzstudy highlights the need for conservativewithdrawal rates. The study also impliesthat there is a need for future retirees toaccumulate liberal amounts of capital tofund a comfortable retirement.

It's expensive to retire. For everydollar of retirement income needed, youmust have $20 to $25 at work for you.Therefore, it's never too early to beginplanning for retirement.

Frank Armstrong III is the founderand principal of Investor Solutions,Inc, a fee-only, SEC-registeredinvestment advisor. He is also theauthor of The Informed Investor:A Hype-Free Guide to Constructinga Sound Financial Portfolio (Amacom; 2002),which is now available in paperback. For moreinformation, visit

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