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Systematic Withdrawal Plans
You should take a good, hard look at what is perhaps the savvy investor's
best-kept-secret, Systematic Withdrawals. While dollar-cost-averaging is a strategy for
long-term "buying," a systematic withdrawal plan is a strategy for long-term
"selling." Think of it as dollar-cost-averaging in reverse.
Many people erroneously believe that when you're ready to retire, you should cash in your
stocks for barrels full of bonds. Given the fact that most people will live 20-30 years
(or more) in retirement, bonds will not provide the growth needed to keep up with the
rising costs of living. You will either have to learn to live on less or deplete your nest
egg. On the other hand, you can keep most or all of your stocks, draw ever-increasing
income from your portfolio and still leave something for your heirs. Let's look at some
examples:
If you had invested $100,000 in the Lipper General Bond Fund Average Index on March 31,
1977 and reinvested your dividends, you could have withdrawn $500 per month from your
account and increased this withdrawal by 3% per year, without running out of money. By
March 31, 1997 you would have withdrawn a total of $202,902 and your account value would
have dropped to $87,620.
On the other hand, if you had invested $100,000 in the S&P 500 Composite Index on
March 31, 1977 and reinvested your dividends, you could also have withdrawn $500 per month
from your account and increased this withdrawal by 5% per year, without running out of
money, but your account value would have grown to $642,836.
Just for fun (using the same indices), let's say you wanted to withdraw $750 per month and
increase your withdrawals by 5% per year. In bonds, you would have withdrawn a total of
$173,296 and gone broke on November 30, 1990. In stocks, you would have withdrawn a total
of $304,353 by March 31, 1997 and still had an account balance of $143,655.
I invite you to have me perform this same type of analysis on any of the many stock mutual
funds which have been around for a comparable length of time. The results will be similar
and probably better.
So why doesn't everyone do this? Frankly, I don't know, except that most people have an
instinct which tells them to preserve principal and live off income, and a systematic
withdrawal plan may involve the invasion of principal (especially during the early years).
Which explains why most people aren't rich.
Tax-deferred investments will make the most out of your systematic withdrawal plan. These
include IRA mutual funds, variable annuities, and variable life insurance. Variable life
insurance has the added tax benefit of paying an income-tax-free death benefit to your
beneficiaries.
Michelle H. Wilbers, a noted expert in
financial services for women, is a Registered Investment Advisor and owner of Women's Financial Services, a company dedicated to
providing women with sound financial advice. Women's Financial Services does not provide
legal or tax advice. You should always consult a qualified professional for advice
regarding your particular situation.
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