Bring in a Steady Retirement Paycheck

Ed Rabinowitz

Physician's Money Digest, September15 2004, Volume 11, Issue 17

There are many uncertainties in adoctor's life, but one certainty isthat a time will come when you'reready to retire from practice. When thattime comes, you'll want to know that theretirement nest egg you've accumulatedwill not run dry during your golden years.


According to a recent report in ,the best way to create that reliable retirementpaycheck is to utilize a two-prongedstrategy. First, set a low withdrawal rate—initially about 4% of the value of yourportfolio and increase that amount annuallyto allow for inflation. Second, adoptan investment strategy combining annuitiesand mutual funds.

Choosing an Annuity

What an annuity does is virtually guaranteeyou an income stream for as long asyou live. When you purchase an annuity,you pay the insurer a lump sum of cash. Inreturn, you receive regular income paymentsfor the rest of your life, or for a predeterminedperiod of time.

There are essentially two types of annuities:fixed and variable. In brief, fixedannuities guarantee a set payment eachmonth. If operating on a budget is importantto you, a fixed annuity might be theway to go. Variable annuities providemonthly payments that fluctuate.

The downside to annuities is that whenyou purchase one, you give up access tothose funds. In addition, annual fees canexceed 2% of your portfolio's value.


The solution, the article suggests,is to invest a portion of your retirementportfolio between 25% and 50% inone or more low-cost annuities, and putthe rest in mutual funds or stocks andbonds. Combine the fixed income fromthe annuities with other sources of regularincome—such as Social Security or companypensions to cover essential living expensesand regular monthly bills. Thefunds remaining in your investment portfoliocan be used for discretionary andemergency spending.

Testing the Strategy


Setting up a strategy to fund yourretirement is fine in theory, but does itwork in practicality? Working with IbbotsonAssociates, a Chicago investment firm,the author of the article put thestrategy to the test. Consider the followingscenario. A 65-year-old man has $500,000in savings. He would like to withdraw 5%,or $25,000, during his first year of retirement,and then increase that amount eachyear to allow for inflation. Assume thatthere are four options for doing so:

• Option 1: Take the entire $25,000from an investment portfolio.

• Option 2: Obtain a portion of the$25,000 by investing 25% of his assets in afixed annuity and the rest through withdrawalsfrom the remaining 75% that areinvested in funds.

• Option 3: Do the same as Option 2,but purchase a variable annuity instead.

• Option 4: Invest 50% of assets inannuities—25% in fixed and 25% in variable—and the remaining 50% in funds.

According to the article, when Ibbotsonran the four computerized simulationsusing long-term historical results forstocks, bonds, and inflation, it found thattaking the entire 5% out of the portfolioworks fine for about 10 to 15 years. However,once the individual passes age 80,the risk of the money running outincreases dramatically. Fortunately, thatrisk decreases proportionally as the assetsare invested in one or more annuities. So,carefully plan which of your assets toannuitize.