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The Wealthy Are Freaking Out -- And So Should You

A recent Bank of America survey found that a bunch of wealthy Americans have been changing their ways. Among other alterations, they're:

  • Giving less to charities
  • Cutting back on personal luxuries
  • Investing more in their 401(k) plans
  • Delaying retirement

Those changes make sense when you learn that 53% of them are worried about not having enough money for retirement. They fear running out of money before they run out of breath. That's a healthy concern -- provided it makes you assess your own situation, and find ways to get your glorious retirement back on track.

Going through withdrawal
Having enough money for your golden years depends on how much you retire with, and how much you withdraw each year in retirement. With these inputs, you can use a simple compounding calculator to figure out how much you can expect to end up with in retirement. If you save and invest $10,000 per year, for example, for 20 years, you'll end up with $630,000 if your average growth rate is 10%. (To play it a little safer, you might want to assume slower growth, such as 8%.) Will that expected nest egg be enough for you?

According to my favorite retirement resource, our Rule Your Retirement newsletter, you should conservatively plan to withdraw about 4% of your retirement money per year. With that in mind, 4% of $630,000 is about $25,000, or $2,100 per month. Will that be enough for you?

This is where the importance of planning comes in. Imagine that you arrive at retirement with no plan, and you think you're being safe withdrawing 7% of your nest egg each year. Think again. Suppose your retirement lasts 30 years, and your portfolio is 75% stocks and 25% bonds. According to several studies, there's at least a 12% chance that you'll outlive your nest egg. Small, yes -- but would you want to risk it? And remember, many of our retirements could last far longer than three decades.

Unexpected consequences
How well your investments do during your retirement can also have a big effect. Imagine planning to retire at the end of 2008 -- if your nest egg was largely in the S&P 500, you'd have suffered a loss of nearly 40%! If your $800,000 nest egg suddenly becomes $480,000, your retirement outlook will change, big time. (Fortunately, working just a few more years can dramatically improve your situation.)

These kinds of fluctuations explain why experts these days agree on a 4% withdrawal rate, in order to be fairly sure your money will last. (You increase each year's withdrawal according to the inflation rate.)

Beef up
Run the numbers and see where your own retirement is headed. If the figures don't add up the way you'd like them to, these steps can help you recover:

  • Save and invest more. The sooner, the better, since early dollars have longer to grow.
  • Maximize your 401(k) plans and IRAs. Remember that Roth IRAs will let you withdraw your assets tax-free!
  • Work a little longer. A few more years can make a big difference.
  • Downsize your expenses. Whether now or in retirement, you can cut back by moving to a smaller home or a less expensive town.
  • Invest more effectively. Bonds can give you some security, but they won't make you rich anytime soon. But powerful individual stocks and mutual funds can deliver growth rates topping 10% over long periods (though that's never guaranteed).

Here's a model portfolio allocation guide for Fools 10 or more years from retiring, courtesy of Rule Your Retirement. Feel free to tweak these numbers to meet your own needs and preferences:

Asset Category

Portion of Portfolio

Representative Fund

Representative Holdings

Large-cap Stocks

35%

Vanguard 500 Index (VFINX)

Oracle (Nasdaq: ORCL  ) , Visa (NYSE: V  ) , Chesapeake Energy (NYSE: CHK  )

Mid-cap Stocks

15%

Vanguard Mid Capitalization Index (VIMSX)

Intuitive Surgical (Nasdaq: ISRG  ) , Seagate Technology  (NYSE: STX  )

Small-cap Stocks

15%

Vanguard Small Cap Index (NAESX)

Palm (Nasdaq: PALM  ) , Dendreon

International

25%

Vanguard Developed Markets Index Fund (VDMIX)

Vodafone (NYSE: VOD  ) , GlaxoSmithKline

Bonds

10%

Vanguard Intermediate-Term Bond Index (VBIIX)

U.S. Treasury Notes

If you haven't spent any time figuring out how much you can expect to end up with in retirement, then maybe you should freak out a little. But when you're done hyperventilating, take the time to assess your situation -- and then start a plan to improve it. The best defense against retirement freakouts, after all, is a big, fat nest egg.

Need more help? A free 30-day trial of Motley Fool Rule Your Reitrement will give you full access to our archives, including several model portfolios and many more recommended funds.

Longtime Fool contributor Selena Maranjian owns shares of Chesapeake Energy and Intuitive Surgical. Chesapeake Energy is a Motley Fool Inside Value recommendation. Intuitive Surgical is a Motley Fool Rule Breakers selection. The Fool owns shares of Chesapeake Energy, Oracle, and GlaxoSmithKline. The Motley Fool is Fools writing for Fools.


Read/Post Comments (15) | Recommend This Article (42)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 02, 2010, at 3:02 PM, DrRoberts1 wrote:

    Other behaviors of the wealthy not mentioned above, increased contributions to the Republican Party and a redoubling of efforts to limit Obama to one term.

  • Report this Comment On February 02, 2010, at 4:35 PM, BlkAngus10 wrote:

    How many of our retirements are actually going to last FAR longer than three decades, as the author states?

  • Report this Comment On February 02, 2010, at 4:41 PM, BlkAngus10 wrote:

    I would interested to know the percentage of Americans whose retirements actually last far longer than 30 years.

  • Report this Comment On February 02, 2010, at 4:50 PM, katheter wrote:

    Dr. Roberts1 thinks Republicans are good for the rich and they are. However, they're not so good for the economy of our country. What were the results of eight years of tax cuts for the rich, non-regulation of Wall St. and spending on 2 wars and prescription drug benefits with big donut holes for consumers? I don't have to tell ya.

  • Report this Comment On February 02, 2010, at 4:52 PM, AubieFool wrote:

    Perhaps the more pertinent question is how many of you will have $630,000 to draw from when you retire? And that's measured in 2010 dollars, mind you.

  • Report this Comment On February 02, 2010, at 5:00 PM, Wharton93 wrote:

    8 years of what? Pelosi and Reid took over with the Nov 2006 elections which put them in power in January 2007. 3 years now of them. 3 years now of them chairing the committees. Go youtube mid 2008 for "freddie and fannie are SOUND"...a great LOL moment by Barney Frank (D-Mass) just a few months before the world ended. As for non-regulation of Wall Street, I don't know, I thought it was a Democratic President we had in 1999 when Glass Steagall was repealed. Both parties, criminals.

  • Report this Comment On February 02, 2010, at 5:46 PM, ds10 wrote:

    Short of printing your own money on your attic press, there's only one way to ensure you won't run out of money during retirement. And The Motley Fools have a blind spot when it comes to this investment. For some obscure reason it is never mentioned when this topic periodically arises.

    It's a fixed lifetime annuity. Preferably several so as to spread risk. And the sooner you can start the better, well before retirement. It's comfortable to see the fixed monthly checks rolling in during both high and low financial tides. Sure, inflation can nibble at a fixed income, but by ensuring a sound initial investment, you can weather this.

    A variable annuity is also a reasonable

    approach, but as seen during the last couple of years,

    it is uncomfortable to see the income shrink month after month. But at least it's income for life. And when the sun finally shines, the income should rise.

  • Report this Comment On February 02, 2010, at 10:31 PM, jesse2159 wrote:

    One solution is to become obese, then start smoking cigarettes and buy lottery tickets with any cash you have left over from your unemployment check. With any luck at all, some government program will adopt you, support you and bury you without you having to invest a dime in your own future. People seem to be doing it all the time. And all too often, outliving those of us who cared enough to do what was right all of our lives.

  • Report this Comment On February 03, 2010, at 8:12 AM, vbbv wrote:

    Are you kidding me? Your "model portfolio" has NO exposure to emerging markets??

  • Report this Comment On February 04, 2010, at 9:58 AM, ewent0 wrote:

    Methinks the dotcome blitz is still upon us. When business can be so disposable that it is here one year and gone the next while some CEO runs off with a couple of billion in his bank account, money, not business is all that matters. There are consequences for greed just as there is for any other excesses.

    How can anyone expect investors to invest in these all too disposable corporations and place their full faith in a positive outcome? Wall Street has become a corporate casino that uses word salad to insure that they stay ahead of investors.

  • Report this Comment On February 04, 2010, at 5:25 PM, freddywalky wrote:

    I'm gonna tell you what you should do to guarantee an income during retirement. Save up as much as possible and apply the following techniques which work in rising, falling or stagnating markets and are unrelated to politics, Wall Street, any companies or businesses, debt investing (bonds), etc...:

    - a iron condor on the NDX or MNX with short strikes at +/-10% if 1 month away or +/-15% if 2 months away. Your long strikes should be 50 points outside your shorts. The amount of your portfolio at risk on this trade shouldn't exceed 50%. The remainder 50% should be readily available if one of the short strike is breached and you need to adjust. IF anyone tells you iron condors are risky, this is because it is true. This technique can yield avg 3-5% on your entire portfolio per month fairly safely.

    You need to test this technique and be confronted to situations where an adjustment is necessary. Thinkorswim offers a tool called "thinkback" to backtest trades and it is useful to validate theories. They also offer a PaperMoney account to play with fake money.

    The NDX and MNX are the Nasdaq 100 index and mini-index (MNX = 1/10 x NDX). What's interesting with both these indices is that their options are cash-settled european-style options that cannot be exercised before the expiration date and the gains/losses realized using these options are 60% LT/40% ST regardless of the holding period.

    If you don't know what Iron Condors are, then learn. One needs to be aware of what's out there. I got burnt with options once because i didn't really understand them. I stayed away for a while and got drawn back to them. This time I read all I could find on them and now I know what's possible with them. One can use options recklessly and with a great amount of risks; or one can use options with care and a small amount of risks.

    - if an Iron Condor is too risky for you, the following is going to pick your curiosity because it is very safe. Buy a deep ITM LEAPS Straddle on QQQQ (the further one out possible), which consists of a deep ITM LEAPS call w/ a delta of .80 minimum and a deep ITM Leaps Put w/ a delta of -.80 maximum. A Leaps contract is a long term option that expires 1 year or more into the future. The amount at risk w/ this technique is small although the amount of money invested will be large. Let's assume that the QQQQ is at 50; a "Jan12 30 Call" will be $22 per contract (current price - strike + time value = 50 - 30 + 2 = 22). Similarly a "Jan12 70 Put" will be $22. Each contract gives the right to control 100 shares and therefore a straddle such as this one would cost 22x100 + 22x100 = 4400 to purchase. But only 10% of this investment ($400) is really at risk because your straddle will never be worth less than 4000 at expiration.

    My technique requires purchasing a minimum of 3 straddles and then writing 1 OTM call in the nearest month against my 3 LEAPS calls and 1 OTM put in the nearest month against my 3 LEAPS puts. This provides income month in and month out. If one of my shorts becomes ITM, I buy back the option when there's only .05 left in time value and write as many new OTM ones as needed to maintain a credit.

    It's not simple to understand at first but I back tested this on the QQQQ since 2005 and I averaged 20% per year. At the end on 1 year you sell your LEAPS and buy new ones even further out.

    An index ETFs like QQQQ is great because it offers less volatility than a single stock, move quite a bit anyway over the course of a year and will never be bankrupt although I don't even care with this technique.

  • Report this Comment On February 05, 2010, at 12:53 PM, lcarliner wrote:

    The very wealthy should be willing to pay a little more taxes to preserve the social fabric! To see the future if the Repbulicans succeed in getting their way fully, just go to Mexico! Having to invest in half-million dollar amored vehicles for basic transportation, have to have on the payroll for their gated community a full-time squad of armed bodyguards, navigating their business through a thicket of doling out bribes to government servants so badly underpaid and respected as to be irretretrievably corrupted is no way to enjoy ill-gotten wealth! Wake up America and just look no farther than Mexico to see what the future could be if the Republicans continue to get theri way!

  • Report this Comment On February 06, 2010, at 9:25 PM, wolfman225 wrote:

    @Icarliner:

    "The very wealthy should be willing to pay a little more taxes to preserve the social fabric! To see the future if the Repbulicans succeed in getting their way fully, just go to Mexico! Having to invest in half-million dollar amored vehicles for basic transportation, have to have on the payroll for their gated community a full-time squad of armed bodyguards, navigating their business through a thicket of doling out bribes to government servants so badly underpaid and respected as to be irretretrievably corrupted is no way to enjoy ill-gotten wealth! Wake up America and just look no farther than Mexico to see what the future could be if the Republicans continue to get theri way!"

    Idiot. Typical thought(less)-process of a liberal whiner too lazy (or stupid) to make themselves successful and constantly look outside themselves for someone to blame for their failure. The "rich" already pay in an amount far disproportionate to the rest (the bottom 50% of wae earners contribute less than 3% of federal income tax revenue). This is particularly true if you take into the amount of governmental goods and services they get in return.

  • Report this Comment On February 08, 2010, at 1:29 AM, radicalaccountin wrote:

    This is a sensational title for a boring article. This article doesn't have have much to do with the wealthy and nothing to do with freaking out.

  • Report this Comment On February 12, 2010, at 1:29 PM, Classof1964 wrote:

    There is no point in name-calling or in having fixed rigid ideological positions on taxes, government's role, etc. The world is too complex and changes too much to be well run by such mantras or oversimplifications.

    Yes, both parties contributed to the financial disaster we hare in and will be for years. The Democrats under Clinton repealed Glass Steagall and even worse passed "reform" legislation that overrode all the state prohibitions against credit default swaps. Thus the protections learned in the 1907 crash and from the Great Depression were eliminated.

    The Republican Party, which is no longer a party of a moderates and a far right wing, does not believe in government taxes or government regulation for the public good, and did appoint such administrators under Bush. Many have noted that if the existing laws had been enforced from 2001-2008 the results would we live with would not have been as dire.

    So one has to ask whether we have the best Congress that money can buy. Wharton 93 above claims that the Democrats were responsible for the federal government since 2006 (3 years) and forgets that the president has a veto and the administration controls the federal agencies. The more fundamental question is whether today our political system is capable of addressing the serious problems we have as a nation.

    There is a huge rural, small state overrepresentation in the Senate. Two thirds of the population lives in states that have only 40 or so votes in the Senate. With the Republican Party controlled by a radical right wing, can we realistically expect the kind of compromises Everett Dirksen and Lyndon Johnson made for bipartisan legislation?

    Sure, 20% of the population has made out well over the last 30 years since the Reagan tax cuts and the rise of the new right. But if about 68% of the economy depends on consumer spending and if real wages have not risen for most of the wage earners for decades, do we as a nation have the right business model? Consumers (as well as governments and businesses) borrowed since the 1980s until recently, an unsustainable basis for a good economy, taken to the extremes it was and with the 20th century safeguards removed.

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Selena Maranjian
TMFSelena

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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