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Publication: Investor's Notebook
HOW TO REDUCE RISK IN RETIREMENT WITHDRAWALS

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        Investor's Insight - September 13, 2006           
          "A Digest of Investment Opinion From the 
             World's Leading Financial Advisers"


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HOW TO REDUCE RISK IN RETIREMENT WITHDRAWALS
by Scott Burns

Q: Have any general views been established concerning 
exactly how to take required minimum distributions 
(RMDs)? Suppose, for instance, that you have three or 
four mutual funds in an IRA. How do you decide which 
ones to take the distributions from? Should you take 
the annual distribution on Jan. 1? Or should you take 
them throughout the year? Is there an optimal method? 
-- N.M., Round Top, Texas

A: I think there are two ways to do this to greatest 
advantage. One is to take the withdrawal once a year 
(or twice at most) when you rebalance your portfolio's 
asset allocation. This way, you can reduce the asset 
(fund) that has outgrown its allocation by redeeming 
shares and using the cash for your expenses. 

Suppose, for instance, your portfolio goal is to be 60 
percent equities, your actual allocation has grown to 
70 percent equities after a big market rise, and your 
RMD is 4 percent. Then part of your reallocation will 
be to make a 4 percent distribution from equities.

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Another line of defense is to use a ladder of individual 
bonds rather than a bond fund. This will provide you 
with a stream of cash that is free of interest-rate risk. 
A five-year ladder of TIPS (Treasury Inflation-Protected 
Securities) would insulate you from any interest-rate 
risk for five years. It would also protect you from a 
falling stock market by helping you avoid the need to 
sell stocks in a down market.

According to Ibbotson Associates, for instance, 66 of 
the 76 five-year periods since 1926 have produced pos-
itive equity returns. That's 86.8 percent of the time, 
a good deal better than the 71 percent of single-year 
periods.

Build the investment period out to 10 years, and 
equities have positive returns in 69 of the 71 periods, 
or 97 percent of the time.

With starting RMDs in the vicinity of 4 percent, this 
means you can increase your portfolio safety by holding 
20 to 40 percent of your portfolio in a bond ladder. 
That, by the way, is the "sweet spot" in the 
studies of portfolio survival after you have begun mak-
ing regular withdrawals. To learn more, check the "port-
folio survival" reader on my Web site, www.scottburns.com. 
Access to the site is free but requires registration.

Q: What is your take on some recent warnings about a 
coming economic crisis due to the escalating price of 
oil? Billionaire Richard Rainwater talked about this 
in a December 2005 interview. Stephen Leeb warns of 
"The Coming Economic Collapse" in his book by that 
title. These people are "serious Wall Street types," 
at least to my uninformed eye, and what they're saying 
sounds very dire. -- J.H., Salem, Ore.

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A: You've got plenty of company in that worry. Readers 
who want to get up to speed on the issue should Google 
"peak oil." Then follow the links. My personal belief, 
backed by having a 20 percent allocation to energy 
stocks in my personal investments, is that oil and 
natural gas are in a long period of supply/demand 
imbalance, with great vulnerability to the Middle East. 
While the "peak oil" debate may go on for 
years, the bottom line is that the value of BTUs is 
going up relative to the value of paper currencies. 
And this will continue for the foreseeable future, 
barring a global collapse from some other problem.

That doesn't mean "the world as we now know it" is 
ending. The cost of energy plays a far smaller role 
in our lives and economy than it did during the 1973 
OPEC embargo. As we did back then, we will slowly, 
reluctantly, adjust to rising energy prices by chang-
ing the vehicles we drive and making other changes in 
our energy consumption habits.

Even the alarmingly large crowd of people who would 
rather show off than conserve will change their habits 
when energy consumption becomes an instant indicator 
of both stupidity and social indifference. 

You can discuss this issue or any other topic in the new 
Investor's Insight forum. Check it out here...

 
Investor's Insight Forum

(Investor's Insight reflects the opinions of experts. It does 
not recommend any specific investments, and no endorsement is 
implied or should be inferred. For more information, contact 
the individual firms cited).

COPYRIGHT 2006 UNIVERSAL PRESS SYNDICATE

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