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Annual Retirement Guide July 3, 2008, 5:00PM EST

Spending Safely

(page 2 of 2)

In contrast, when valuations are low (with the 10-year p-e below 12), Kitces suggests that a retiree could start with a 5.7% withdrawal, since prices are more likely to trend upward. That rate might not seem appreciably larger, but it could yield real spending that is 10% to 20% higher each year over a multi-decade retirement. The study can be viewed online at the Kitces Report (www.kitces.com/retirementwhitepaper.php) until July 31, 2008.

Kitces' plan is based on the same idea as the 4% solution, except that it permits higher initial withdrawal rates in some market conditions. Financial adviser Guyton, who argues against withdrawal equations that don't allow for flexibility, compares Kitces' recommendation to "driving a car with no brakes and no mirrors" because it doesn't permit any midstream corrections. Retirees who follow an inflexible schedule could feel deprived when the markets are flush and worry when the markets are getting pummeled, he says. Guyton believes initial withdrawals can be as high as 5.2% to 5.6% for portfolios that contain at least 65% stocks. In return, however, retirees must follow certain rules, including maintaining their annual withdrawal at the previous year's amount following a year of market losses.

Kitces acknowledges that "in reality, life is more variable than a spreadsheet can model." His research was meant to demonstrate the impact of market valuation and to yield more flexible retirement-income suggestions, he says, not to prescribe a strict spending pattern indefinitely.

Flexibility is factored into Bengen's revised approach, which permits withdrawals to fluctuate within guidelines. His "floor-and-ceiling strategy" suggests that an initial withdrawal rate of 5.16% would be appropriate if a retiree pares back subsequent withdrawals by as much as 10% of the initial withdrawal during hard times (the floor). On the other hand, a retiree could withdraw extra cash equaling up to 25% of the first-year withdrawal (the ceiling) when the market is strong. The starting rate would vary depending on how much volatility a retiree could stomach. (More details on his research are at billbengen.com.)

Bengen concedes that none of this research is likely to conclude the debate on the best way to safely siphon cash out of a retirement portfolio. "Because there is an element of judgment and uncertainty in the future, there will be no absolute solution," he says. As for the current unsettled market environment, he adds: "In general, I think you are better off planning conservatively initially because you can always make adjustments later."

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