HOW MANY YEARS IT TAKES TO USE UP $100, 000

You probably have seen many of these tables- and this one was copied directly from a major charity. Problem is, part of it is wrong. Worse yet, it's almost totally deceptive. Look at the comments below the chart.
Monthly Withdrawal 3% 4% 5% 6% 7% 8% 9% 10%
$400 32 43
$500 23 27 34 62
$600 18 20 23 29
$700 14 16 18 20 25
$800 12 13 14 16 18 22 30
$900 10 11 12 13 14 16 19 26
$1,000 9 10 10 11 12 13 15 17
$1,200 7 8 8 9 9 10 10 11
$1,400 6 6 7 7 7 8 9 9
$1,600 5 5 6 6 6 6 7 7

*ROUNDED- but in such a manner it defies conventional rounding so it's really wrong.

First thing is this- all the returns are based on an after tax rate of return. A 10% net return in the 28% tax bracket means the overall return would have to be a consistent 13.88% annually- a joke. The 7% return means a "true" 9.72% return had to be made before tax. So, anyone using the chart is undoubtedly using it incorrectly and probably to their extreme financial detriment.

Is there more? Sure, because the monthly withdrawal should reflect a budget. Now, if the $400 a month budget was actually going up by an inflation rate of 3% annually (a factor that MUST be recognized), what impact does that have????? A BIG one!

HOW MANY YEARS* DOES IT TAKE TO USE UP $100,000 AT 3% INFLATION

Monthly Withdrawal 3% 4% 5% 6% 7% 8% 9%
$400 21 24 27 32 43
$600 14 15 17 19 21 24 30
$800 10 11 12 13 14 15 17
$1,000 9 9 9 10 11 11 12
$1,200 7 8 8 8 9 9 10
$1,400 6 7 7 7 7 8 8

*Conventional Rounding

As an observation, note how the much lower the years drop when inflation is left to compound over a long period of time. The $400 at 3%, no inflation would take 32 years for the$100,000 to be depleted. At a 3% return and 3% inflation, the time frame drops to 21 years- a significant difference. But when you take out lots of money- say $1,400- the 3% return eliminates the kitty in 6 years- but that is essentially the same if you have a 3% return AND a 3% inflation. It's just that the inflation does not have that much time to impact the formula and therefore is not as much a concern.

Let's go one step further though and take into account an after tax rate of return AND an inflation factor of 3%. This becomes more real life and the actual figures you need to address. As a personal comment, this is how retirement planning is SUPPOSED to occur- but rarely does since neither the planners, nor charities, nor brokers, nor just about anyone else truly recognizes what does into the formulas and how they really impact a person's life. Unfortunately, it's also why people get screwed because they tend to universally use these people under the (false) perception of competency.

I will assume a 30% total bracket of a 28% federal tax bracket and a corresponding 2% state bracket. This should be conservative for most retirees. In order to be more precise, you would obviously use your own state numbers and have the capability with the HP12C. If you can't use a financial calculator, your agent must have such competency. Otherwise, don't expect your retirement plan to be worth much at all.

HOW MANY YEARS DOES IT TO USE UP $100,000 AT 3% INFLATION IN A 30% TAX BRACKET
Monthly Withdrawal 3/2.1% 4/2.8% 5/3.5% 6/4.2% 7/4.9% 8/5.6% 9/6.3%
$400 20 21 23 24 27 30 35
$600 14 14 15 16 17 18 19
$800 10 11 11 12 12 13 13
$1,000 9 9 9 9 10 10 10
$1,200 7 7 8 8 8 8 8
$1,400 6 6 7 7 7 7 7

*Conventional Rounding

Notice the huge differences between the top and bottom charts? Using the simplistic and "UNREAL" numbers, a 8% return at $800 a month seems to indicate that one would have 22 years of good payments. But by the time you subtract taxes and add in inflation, it's only 13 years. So figure out how well you would do in your retirement years when you were 9 years SHORT in the money you expected.

Want even more info on real life budget examples? Here is an article by William Bernstein.

RETIREMENT SAVINGS: (1998) Percent of groups that save for retirement (Eighth Annual Retirement Confidence Survey) 

Hispanics- 37%

Blacks- 47%

Asians- 62%

Whites- 66%

Percent of Baby Boomers who: (2000)

Plan to work at least part-time during their retirement years 80%

Are very, or fairly, optimistic about their retirement years 69%

Have given a lot, or some, thought to their retirement years 72%

Expect to move to a new geographic area when retired 21%

Expect they will have to scale back on lifestyle when retired 35%

Expect to devote more time in retirement to community service and volunteer activities 49%

Do not want to depend on children during retirement 70%

Think you should be able to depend on family financially for retirement 9%

Think they can count on self-directed sources of income such as IRAs and 401(k)s 68%

Think they can count on Social Security for retirement income 48%

Believe their generation will live longer than their parents' generation 67%

Believe their generation will be healthier than their parents' generation 56%

Source: AARP study, Baby Boomers Envision Their Retirement, February 1999, American Demographics, Sept 2000

How Compounding Costs Erode Wealth

by Albert Fredman from May 2002 AAii Journal

====================================================

Future Value of $10,000 Compounding @ 10% Annually

5 Years.......10 Years........20 Years............30 Years.............40 Years

$16,105.......$25,937.........$67,275..............$174,494.............$452,593

=====================================================

Future Dollar Loss From Compounding Costs

..........................Length of Investment Horizon...................................

EOR.....5 Years.....10 Years........20 Years...........30 Years........40 Years

% $ $ $ $ $

0.10%....$ - 73......$ - 235..........$ - 1,213............$ - 4,697.......$ - 16,169

0.15%....$ - 110.....$ - 352..........$ - 1,811...........$ - 6,999......$ - 24,042

0.20%....$ - 146.....$ - 468..........$ - 2,405...........$ - 9,274......$ - 31,775

0.25%....$ - 182.....$ - 583..........$ - 2,993........... $ - 11,513......$ - 39,373

0.50%....$ - 363.....$ -1,155...........$ - 5,859...........$ - 22,291.....$ - 75,399

0.75%....$ - 542.....$ -1,715...........$ - 8,603...........$ - 32,378.....$ - 108,355

1.00%....$ - 719.....$ -2,264...........$ -11,231..........$ - 41,817.....$ - 138,498

1.25%....$ - 895.....$ -2,801...........$ -13,746..........$ - 50,649.....$ - 166,062

1.50%....$ -1,069....$ -3,328...........$ -20,155..........$ - 58,912.....$ - 191,262

2.00%....$ -1,412....$ -4,340...........$ -20,665..........$ - 73,667.....$ - 235,347

2.50%....$ -1,749....$ -5,327...........$ -24,796..........$ - 86,944.....$ - 272,150

Future Percentage of Loss From Compounding Cost

EOR ...........................Length of Investment Horizon................................

% 5 Years........10 Years........20 Years......30 Years.......40 Years

0.10%........ - 0.45.......... - 0.91......... - 1.80........ - 2.69......... - 3.57%

0.15%......... - 0.68.......... - 1.36......... - 2.69........ - 4.01......... - 5.31%

0.20%......... - 0.91.......... - 1.80......... - 3.57........ - 5.31......... - 7.02%

0.25%......... - 1.31.......... - 2.25......... - 4.45........ - 6.60......... - 8.70%

0.50%......... - 2.25.......... - 4.45......... - 8.71........ - 12.77......... - 16.66%

0.75%......... - 3.36.......... - 6.61......... -12.79........ - 18.56......... - 23.94%

1.00%......... - 4.46.......... - 8.73......... -16.69........ - 23.96......... - 30.60%

1.25%......... - 5.55.......... - 10.80......... -20.43........ - 29.03......... - 36.69%

1.50%........ - 6.63.......... - 12.83......... -24.01........ - 33.76......... - 42.26%

2.00%........ - 8.77.......... - 16.76......... -30.72........ - 42.33......... - 52.00%

2.50%........ -10.86.......... - 20.54......... -36.86........ - 49.83......... - 60.13%

Have a nice day.

Teachers, 403(b) and 457- (Dan Otter 2003) EGTRRA allows teachers to contribute $12,000 a year to a 403(b) and $12,000 a year to a governmental 457(b), which has traditionally been offered to state and local government employees. In many cases 457(b) plans were also made available to educators. Teachers have always been allowed to contribute to both plans, but prior to EGTRRA they were limited to the total aggregate amount of the 457(b), which was only $8,500. Instead, savvy educators contributed only to the 403(b), where they were allowed to stash up to $11,000.

Catch-up fever: Up to $41,000

As great as contributing $24,000 a year is, it's the catch-up contributions that make educators want to kick up their heels. Bear with me -- the following gets a little wild, but it's well worth the effort.

Governmental 457(b) plans contain a special "catch-up" allowance called the "final three-year provision" for those approaching retirement (assuming they haven't contributed the maximum amount in prior years). This provision, which used to limit participants to an additional $15,000 over a three-year period, now permits up to 200% of the elective deferral limit, or $24,000 in 2003. This catch-up provision kicks in during the three years prior to "normal" retirement age (as defined by the plan).

Example: If a worker will reach normal retirement age by 2009, he or she can take advantage of the final three-year provision in years 2006, 2007, and 2008. Those who qualify can defer $12,000 to the 403(b) plus $24,000 to the 457(b) for a total deferral of $36,000.

Additionally, anyone age 50 or older can contribute an additional $2,000 (in 2003) to the 403(b). This means a worker could conceivably make $38,000 in contributions during 2003.

Note that the 457(b) also allows workers age 50 or older to make catch-up contributions. However, participants who take advantage of the final three-year provision cannot also take advantage of the age 50 catch-up provision under the 457(b) plan.

The 403(b) has its own additional catch-up provision called the "15-year rule." This special catch-up provision allows participants to increase their annual contribution by $3,000 more than the current $12,000 limit (as of 2003). To qualify, workers must have completed at least 15 years of service with the same employer (years of service need not be consecutive), and cannot have contributed more than an average of $5,000 in previous years.

Contributions made under the 15-year rule cannot exceed $3,000 per year, up to a $15,000 lifetime maximum (under current rules). Add that to the aforementioned $38,000, and a worker could make a whopping $41,000 in contributions during 2003. It is highly recommended that you consult a tax or investment professional (such as TMF Money Advisor) before taking advantage of any of these provisions.

Asset-protection trust. (WSJ) The idea is to put a big chunk of your money in an irrevocable trust. The trust is run by an independent trustee, who may opt to give you payments from time to time. If done correctly, the trust -- which has to be located in a jurisdiction that has passed special laws -- generally can't be touched by creditors if you're sued or file for bankruptcy protection.

Due to the passage of the Sarbanes-Oxley Act, which makes top executives and directors accountable for their company's financial results, more executives are seeking asset-protection trusts.

Most asset protection trusts are located offshore, in locales like the Cook Islands, Nevis and Gibraltar, which have attracted sizable trust business by enacting laws that protect trusts from U.S. creditor claims.

But the number of U.S.-based trusts is now picking up as states change their laws, partly to lure people who are worried about putting their wealth abroad. Alaska, Delaware, Rhode Island, Nevada, and as of this year, Utah, now permit these trusts for both residents and nonresidents.

Rising malpractice insurance rates are a key reason for physicians. In Florida, for example, climbing premiums have spurred many physicians to forgo coverage altogether, and instead use other asset-protection techniques. Marc Singer, a partner at Singer Xenos Wealth Management, Coral Gables, Fla., says that about 60% of his physician clients "go bare" and drop malpractice insurance because of the high cost and limited coverage of policies. That's a big jump from 10 years ago, when only about 20% of his clients practiced without insurance.

A recent survey of individuals with more than $1 million in assets found that 35% had some form of asset-protection plan, compared with just 17% of respondents in 2000. And more than 61% of the respondents who didn't have an asset-protection plan were interested in creating one, up from only 43% in 2000

Domestic asset-protection trusts are controversial, because they haven't yet been tested in court and it is still unclear how well they'll hold up.

Domestic asset-protection trusts also can also be used to ease estate taxes. Because you give your assets to the trust, the funds are out of your estate for estate-tax purposes. However, the trust can't make payments to you on a regular basis, or that would invite the scrutiny of the IRS.

Offshore asset-protection trusts can cost anywhere from $20,000 to $50,000 to set up, plus annual administrative fees of $2,000 to $5,000 and asset-management fees of about 1% on the assets placed in the trust. Domestic asset-protection trusts cost less, running anywhere from $3,000 to $10,000 in attorney's fees, plus asset-management fees of roughly 1%.

Because of the high fees, asset-protection trusts generally don't make sense unless you're willing to put at least $1 million in them.

Retirement withdrawals: (2005) Trinity University in Texas created one of the first studies on taking withdrawals in retirement, using data from 1926 through 1995. The findings: If you don't increase your withdrawals for inflation, you can spend 7% of your portfolio every year for 30 years in an all-stock portfolio and have a 15% chance of running out of money.

Split your portfolio between stocks and bonds, and your chance of dying destitute falls to 10%.

But inflation will erode the buying power of your withdrawals. If you take out more money each year to offset inflation, your chances of dying broke increase precipitously: 41% if you have an all-stock portfolio and withdraw 7% a year. (See chart).

Other studies have come to similar conclusions. The Baltimore mutual fund company T. Rowe Price used Monte Carlo analysis — named after the European casino — to see the odds of running out of money under thousands of potential market scenarios. Its conclusion: If you want to adjust for inflation, a 4% withdrawal rate over a 30-year retirement is about the most you can handle.

Straight line returns versus real world  2000 article by Professor Sam Savage

Funds remaining with annual withdrawal of $32,000 , assuming 14% return every year

Start: 1973 Avg. Return 14% Tanks in 8 yrs.

Start:1974 Avg Return 15.4% Goes the distance.

Start: 1975 Avg. Return 15.4% Tanks in 13 yrs.

Start: 1976 Avg. Return 15.3% Tanks in 10 yrs 

Real easy to see why flat rate reruns by most software programs simply don't work.

Retirement with $1,000,000 (2006)

Year Withdrawal Rate Retiree #1   Return           Retiree #2     Return          Retiree #3                 Return

                              Int. Term Gov’t. Bonds    100% S&P 500                       Fixed Income/S&P 500 Blend 

                              100% Fixed Income                                                          40%60% Blend 

1970   $ 60,000   $1,098,484.00 16.86%     $ 977,694.00 4.01%                    $1,026,010.00   9.15%

1971  $ 62,100   $1,126,756.68 8.72%       $1,046,615.50 14.31%                 $1,080,292.49   12.07%

1972                   $1,117,307.32   5.16%     $1,168,594.04 18.96%                 $1,152,571.95   13.44%

1973  $ 66,523   $1,099,225.40   4.61%     $ 940,507.37   -14.66%               $1,010,546.76   -6.95%

1974 $ 68,851   $1,089,002.30   5.69%       $ 640,928.65   -26.47%               $ 813,568.30     -13.61%

1975 $ 71,261   $1,097,430.25   7.83%       $ 781,583.77   37.20%                 $ 931,239.13   25.45%

1976 $ 73,755    $1,155,421.90 12.87%       $ 876,574.75   23.84%               $1,024,281.57   19.45%

1977 $ 76,337      $1,094,300.24 1.41%       $ 742,780.91  -7.18%                 $ 912,453.76     -3.74%

1978 $ 79,009   $1,050,725.38   3.49%       $ 707,315.83   6.56%                   $ 877,884.51   5.33%

1979 $ 81,774   $1,008,581.65   4.09%       $ 740,891.93   18.44%                 $ 897,216.73   12.70%

1980 $ 84,636   $ 960,072.01    3.91%         $ 869,014.21   32.42%               $ 983,352.78   21.02%

1981 $ 87,598   $ 954,922.60    9.45%       $ 743,048.50   -4.91%                 $ 903,225.19   0.83%

1982 $ 90,664  $1,115,757.70  29.10%      $ 792,059.87  21.41%                  $1,011,524.78  24.49%

1983  $ 93,837  $1,097,644.63  7.41%       $ 855,392.39  22.51%                    $1,068,830.53  16.47%

1984  $ 97,122  $1,140,796.28  14.02%     $ 805,814.30   6.27%                      $1,062,757.98  9.37%

1985 $100,521   $1,251,763.33  20.33%    $ 932,115.71   32.16%                   $1,226,159.43  27.43%

1986  $104,039   $1,321,489.61  15.14%    $ 981,022.29  18.47%                  $1,314,429.24    17.14%

1987 $107,681   $1,249,009.54   2.90%      $ 919,017.53    5.23%                   $1,258,614.76    4.30%

1988  $111,449   $1,206,951.36   6.10%     $ 943,320.39   16.81%                 $1,290,859.35   12.53%

1989  $115,350   $1,236,675.09   13.29%   $1,088,698.16   31.49%                $1,460,100.07    24.21%

1990  $119,387    $1,225,999.85   9.73%     $ 938,583.68    -3.17%                   $1,367,392.92   1.99%

1991  $123,566   $1,272,870.25    15.46%  $1,064,005.73  30.55%                  $1,548,738.79   24.51%

1992   $127,891   $1,227,303.59    7.19%   $1,007,915.05  7.67%                  $1,527,099.12    7.48%

1993   $132,367   $1,218,007.61   11.24%  $ 963,015.45     9.99%                 $1,541,039.66  10.49%

1994  $137,000   $1,025,444.09    -5.14%    $ 935,958.44    13.31%              $1,487,299.52    5.93%

1995 $141,795   $1,032,102.49     16.80%   $1,091,419.22   37.43%            $1,738,096.22   29.18%

1996 $146,758   $ 903,937.22        2.10%    $1,162,595.17   23.07%               $1,824,979.05   14.68%

1997 $151,894  $ 815,064.42        8.38%    $1,347,871.04   33.36%               $2,064,051.54    23.37%

1998 $157,210  $ 725,021.00       10.21%   $1,530,951.56  28.58%                $2,311,701.75   21.23%

1999  $162,713  $ 552,355.47      -1.77%   $1,656,116.34   21.04%                $2,405,062.61   11.92%

2000   $168,408  $ 432,286.88     12.59%    $1,352,178.45  -9.11%                $2,227,037.37   -0.43%

2001  $174,302  $ 277,643.45      7.62%     $1,037,944.83   -11.88%            $1,968,983.87   -4.08%

2002   $180,402   $ 109,814.25   12.93%    $ 668,025.51    -22.10%              $1,643,920.95   -8.09%

2003   186,717     Broke!!!!           2.40%     $ 619,444.64    28.70%              $1,722,124.17    18.18%

Average Return                              8.69%                               11.66%                                       10.84%

Worst Year                                   -5.14%                              -26.47%                                      -13.61%

Std. Deviation                                6.68%                                17.37%                                       11.14%

How much???: (Morningstar 2007) I'm 28 yrs. old and recently started a retirement fund. I want to be able to retire by 60. How much do I need to start with and save each month?

29%

assume:

1. your salary right now is "1.0"

2. you get 4% raise every year, and work every year till 60

3. you get 8% return every year, steady

4. you need 80% of your final salary to live on past 60

5. you withdraw 4% of your investments starting at age 60

This is just very rough. Figure 25% overall and you are probably close.