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The Illusion of Wealth

What’s worth more to you: a lump sum of $100,000 or an income stream of $500 per month?

If you’re like most investors, you would pick the $100,000 as being worth more.  In reality, $100,000 can buy an income stream of about $500/month, which means they are worth about the same.

It is much easier for investors to understand what $500 a month can buy versus $100,000.  Investors do not deal with those large numbers on a frequent basis and mistakenly overvalue it causing an illusion of wealth.  It seems like $500/mo is a lot less, but it’s not.

Because of these misperceptions, it’s important to continue to plan for retirement and how the various scenarios might unfold.


The Danger of Taking Too Much

One of the most frequently asked questions regarding retirement income deals with the withdrawal rate.  “ How much can I take out?”. Below is the best chart I’ve seen that illustrates the damage that can be done if a retiree takes out more than 4% per year.

withdrawal rate



Disclaimer: * Hypothetical value of assets held in a tax-deferred account after adjusting for monthly withdrawals and performance. Initial investment of $500,000 invested in a portfolio of 50% stocks, 40% bonds, and 10% short-term investments. Hypothetical illustration uses historical monthly performance from January 1972 through the most recent year from Ibbotson Associates: stocks, bonds, and short-term investments are represented by the S&P 500® Index, U.S. intermediate-term government bond, and U.S. 30-day T-Bills, respectively. Initial withdrawal amount based on 1/12 of applicable withdrawal rate multiplied by $500,000. Withdrawals are inflation adjusted. Subsequent

Tips for Do-It-Yourself Investors

If you manage your own investments, even if it’s only a portion of a larger portfolio, you should have a plan in place.  All too often we see situations where a loved one passed away unexpectedly and left a messy situation for the spouse to deal with.  The following points, summarized from a Morningstar article, explain what the DIY investor should have ready.

Create a Master Directory:

create a list of all accounts and include account numbers, passwords, etc.  It is very easy for some small account to fall to the wayside and disappear.

Draft a short form Investment Policy Statement:

include these bullet points – from Morningstar:

  • How much you can safely spend each year without running out of money
  • Which accounts to tap for living expenses on an ongoing basis
  • The basics of required minimum distributions and which accounts require them
  • Which accounts to tap as a last resort or that you have earmarked for heirs
  • An outline of the three or four most important financial-planning tasks you handle each quarter and each year (Forget anything that’s in the category of “nice to do”; stick to the basics.)
Automate what you can:

Whenever possible, automate processes.  Make sure RMDs go automatically and directly to the bank account.


This step involves consolidation of accounts with similar registrations and reducing the number of holdings.  Accounts with 30-40 holdings can create a lot of confusion.

Tip: Include these notes in the 25 documents you need before you die.

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A Sobering Look at Retirement

A recent study by Natixis and The Boston College Center for Retirement Research paints a bleak picture of retirement for many individuals. People working today may be unable to maintain their current standard of living. The article at goes into the details.

Bottom line:

  • People are not invested properly in the market.
  • They are giving up better rates of return for the safety of principal in a bank account
  • 66% of workers have saved less than $50,000 for retirement

Here’s where it gets scary:
89% of respondents believe they are on track to reach their retirement goals, when only 54% have a plan. 45% did not even have a goal. How can you be on track to reach a goal, when you can’t even define your goal?!