© Copyright 2004                               Managing Spending From Today's Self Directed Retirement Accounts By Robert J. Phillips Over 69.4 million American Baby Boomers will be retiring over the next 28 years. Unlike their parents and grandparents, boomers will not likely be able to rely on a company pension or the government to fund their retirement. More companies are eliminating sponsored pension plans and the future of social security is in doubt. As a result baby boomers and many current retirees will be the first generation that will have to fund their own retirement from monies saved in self directed 401k's and IRA's. What this means is that the risk of managing these withdrawals falls directly on the retiree and not a corporate pension fund or the government. Questions that must be addressed directly by the retiree include: Will my money last for a lifetime? What rate of return can I expect from my investments? How do volatile markets impact my ability to withdraw money? How much money can be withdrawn safely? How do withdrawals in bad markets affect my long-term returns? How does asset allocation affect my return? In other words the retiree will have to deal with a whole host of financial issues that his or her parents never had to face. It will be more important that current and future retirees address these issues. Data indicates that they have not saved as much as they need and as a result must optimize these investments to provide a decent lifestyle during retirement. By far the most important information needed by the retiree to effectively manage this money is the expected rate of return he or she can expect from the investments. There are several tools available to assist the retiree in making this estimate. Unfortunately most of these tools are either overly simplistic leading to erroneous results or so complicated that the average person will not find the information useful. An example of a simplistic tool is the use of average long-term historical returns for stocks, bonds and cash. While this seems reliable, analysis shows that this can lead to erroneous results if the retiree is withdrawing savings during a severe market downturn. These false results occur because money has been withdrawn during a bad market and is no longer available to help recover savings when the market turns positive. Some investment consultants deal with the selection of interest rates in another overly simplistic way. They advise the retiree to withdraw a conservative amount from his or her investments (typically less than 5%). While this will insure that the money will last, it may force the retiree to unnecessarily reduce his or her lifestyle well below the optimum level. Finally there are a few sources in the literature that deal with the problem of withdrawing funds during volatile markets. However they overly complicate it by requiring the retiree to choose a statistically derived number based on how certain the retiree wants to be that the money will last. This brings the problem right back to the retiree by making him or her make a judgement that he or she is not comfortable with. Some retirees will decide that all of this is too complicated. Instead of self- managing their retirement savings will turn to a professional financial manager to handle it for them either privately or with an annuity. This service will cost the retiree approximately 2% of the overall savings annually. While this may not seem like a lotÖit could reduce the retirees lifestyle by 20-25%. In addition many professional financial services are not educated on the issue of withdrawing savings during volatile markets. Their expertise is focused on pre-retirement savings where money is not withdrawn and long-term historical averages are more appropriate. This means that the retiree will still be at risk of losing his or her savings. At Retirement Calculator Inc. we developed the Retirement Calculator to give retirees a simple answer to the question of how much money can be withdrawn regularly from their retirement savings. This simple planning tool analyzes the impact of withdrawing money from your savings account during adverse market conditions. It determines a realistic rate of return for your retirement savings and allows you to optimize your asset allocation between stocks, bonds and cash providing a worry free source of income. The Retirement Calculator analyzed the last 50 years of stock and bond returns. It assumes that you are unfortunate enough to begin withdrawing money at the beginning of the worst downturn. The Retirement Calculator allows you to adjust your asset allocation to optimize your withdrawal rate and produce the highest final savings over your lifetime. The Retirement Calculator unlike many other tools available is a simple and reliable means to manage your retirement spending account. More information about the Retirement Calculator can be found at www.RetirementCalc.com. Robert J. Phillips holds a Masters Degree in Chemical Engineering and is a Registered Professional Engineer. Robert had a distinguished 31-year career with General Motors Corporation from which he recently retired. Robert retired as director of the Corporation's Environmental Activities Staff where he was responsible for environmental and pollution control activities of GM's vast manufacturing operations globally.