Portfolio CHECK-UP

Name: Norma Pendergast, MD

Residence: North Carolina

Age: 63

Family: Widowed; 4 grown children

Years in practice: 29

Type of practice: General surgery

Annual income: $186,000

Savings: $1.65-million 401(k) pension and profit sharing plan; $460,000 traditional IRA

Dr. Pendergast's main concern:

Financial concern: Dr. Pendergast is going to retire this year from general surgery. Her house is paid for, she has no outstanding liabilities, and her children are grown. Between her current pension and IRA, how much can she withdraw in the way of annual retirement income from these accounts, while still maintaining the monies to last her entire lifetime?

The Finance Professor's Solution

First of all, we have to make some assumptions regarding long-term rates of return, life expectancy, and inflation. Let's make the following assumptions: Inflation is 3.5% compounded annually over the retirement planning time horizon; Dr. Pendergast will live to the end of her 90th year; and all monies will have been depleted from both retirement accounts at the end of her 90th year.

You can see from the figures that if Dr. Pendergast invests in very conservative investment vehicles that yield 5% annually net of fees and expenses on a tax-deferred basis, she will be able to withdraw only $90,900 annually, adjusted for inflation. However, if she adopts a somewhat more aggressive investment posture, earning 9% annually net of fees and expenses, she will be able to increase her annual retirement income by more than 50% to $139,100.

The determining factor is the net, tax-deferred rate of return generated by the underlying investments. This long-term rate of return will be a function of primarily 2 criteria: Dr. Pendergast's risk profile and her allocation of monetary assets among the different available asset classes. Therefore, upon retirement, Dr. Pendergast must take an inventory of how her investment monies are allocated within her 401(k) and IRA and determine if the current allocation reflects her overall risk profile. If that isn't the case, she should make the appropriate adjustments to her current investment portfolio.

For more information, call Mr. Kosky at 800-953-5508 or visit www.assetplanning.net.

Thomas R. Kosky and his partner, Harris L. Kerker, are principals of the Asset Planning Group in Miami, Fla, specializing in investment, retirement, and estate planning. Mr. Kosky teaches corporate finance in the Saturday Executive and Health Care Executive MBA Programs at the University of Miami.