In his book, The Black Swan Nassim Taleb recommends paying less attention to the news of the moment; rather reflect on more digested more journalized information. I fully agree. I do not watch or have on ever any television business news shows ever running in my office. James Cramer gives me a huge headache.
Rather, I read the Wall Street Journal and the British newspaper Financial Times on a daily basis. My weekends are television news free as well. Rather I tend to catch up on the week by reading the Economist, which is delivered to my door by Thursday or Friday. I am not a complete Luddite, I bounce around from the print edition, to reading the Economist on my iPad, and listening to articles on the Economist audio edition on my iPhone, as it is blue toothed through my car’s stereo as I drive around on the weekend.
Beyond that, I tend to try to dig deeper into academic research when looking to hone my financial knowledge and skills, an effort I pursue incessantly.
For years, I have relied on the Center for Retirement Research at Boston College for substantive, yet approachable research regarding planning for retirement. Research driven over profit driven, I recommend that folks looking for answers regarding financial issues surrounding retirement to check out CRR’s website at crr.bc.edu. There you will find briefs, solid research and condensed pieces on Social Security, health/long-term care insurance, and financing retirement. For those willing to dig even further, there are working papers on many salient retirement topics.
So, what I have learned and what would I like to share? A common question in retirement is, “Do I have enough to live on and how much can I spend?” A reasonable and fair question that can set the heads of even the most intelligent financial professionals and academics incessantly spinning. There are lots of variables involved, expected return, future inflation, and how long the money will need to last are some of the key issues. Of course how big the whole pot you are pulling from is a huge issue as well.
Academic research has focused on trying to optimize how much funds can be withdrawn from a portfolio. Interestingly, the optimal amount comes doggone close to what the IRS recommends for IRA required minimum distributions (RMDs).
RMDs are a function of two variables; (1) the balance of the IRA was at the end of last year and (2) one’s age. In years when your balance is up, your RMD goes up. In years when your balance is down, your RMD goes down. This rule buffers pulling out money during down years a bit, which really helps in the end. As for the age variable, first of all RMDs do not start until you are 70 ½ so you have deferred withdrawals for quite a while. Beyond that, the IRS RMD rule pretty much works out to be that the older you are, the more money you have to pull out of your IRA. The IRS what’s you to pay taxes on those withdrawals before your die. It also works out, that you are pretty safe to pull out more money as you get closer to St. Peter’s gate, which makes sense on a common sense level.
Using this two variables to determine how much money you withdrawal on an annual basis come quite close to the statistical actuarial optimum you will likely be able to withdraw over the remainder of your life. What you give up in timing you make up for having more money to spend in the end.
On that note, I will close and reiterate that you should check out crr.bc.edu. The Center for Retirement Research at Boston College has a solid Facebook page as well. Sure you can find it!