Margin of Safety for Retirees

by KYW's Salil Gutt

The stock market panic has been gut wrenching for retirees and would be retirees. Unfortunately, stock market storms show up every few years and our emotional ability to deal with them diminishes as we get older.

It is important that retirees establish a margin of safety in their portfolios. This is an additional step beyond a conservative asset allocation which is a given. It is a somewhat stringent test but will provide incalulable peace of mind when future storms hit.

Here's what it is.

Financial planners normally recommend people withdraw no more than 4% of assets in any given year. So allow for a safety factor by reducing the value of the assets used to compute the 4% amount. For instance, if you have have $500,000 of assets. Reduce that amount by 20%, or $100,000. Now take your 4% income distribution off the $400,000 base rather than the $500,000 base.

One addtional thing. Be sure to take just 4% of whatever the values are. This may force you to cut back when times are bad but also allow you to splurge a bit when times are good.