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        Investor's Insight - October 6, 2006           
          "A Digest of Investment Opinion From the 
             World's Leading Financial Advisers"


by Scott Burns

Q: I'm in my 50s with considerable savings. I'm also 
pretty good at my sales job. I am like many, however, 
in that I know how to save but have no idea how to 
pragmatically prepare for retirement income. Is a $1 
million investment portfolio going to send me dividends 
that will pay the bills? Can I generally anticipate a 
return of 6 percent a year? Is there a "How to Cash 
Out for Dummies" manual? -- B.H., via e-mail

A: You can get the CliffsNotes for the "How to Cash 
Out for Dummies" manual on any magazine newsstand -- 
if you hurry. Just pick up copies of the October issues 
of Kiplinger's, Money and Smart Money. The editors at all 
three magazines, in a burst of simultaneous ideation, made 
your question their cover story. 

Kiplinger's cover leads with "Make Your Money Last 

On its cover, Money offers a special 43-page report, 
"Retire Rich: How to Make Your Money Last a Lifetime."


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Here's an item (the Telescopic Walking Stick) that I never 
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when we went for a walk along a trail a few weeks ago. 

It was fun to use.... yes I said fun. When we would come up
to a stream, I would poke at things in it. I also used it
when I wanted to venture off the beaten path, just to make
sure that there were no snakes in front of me. Believe it or 
not, it made the walk more enjoyable. Check it out and the 
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Normal Price: $19.99

Whether you're an avid hiker or just looking for a little
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and the spring loaded shaft helps reduce strain on your wrists, 
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you through hard rocky terrain or just across the street. 

Make Walking Fun with The Walking Stick


And the cover of Smart Money offers "Stay Rich! 
How to Make Your Money Last Forever."

The articles cover the basics on your concern, which 
is called "longevity risk" in polite circles. For the 
rest of us it's just a big-time version of the old 
"end of the money before the end of the month" problem.

One way to think about this is to ask yourself what 
investment return you'll need to have the same purchas-
ing power forever. If inflation averages 3 percent, 
you'll need to have your portfolio grow by at least that 
much each year -- after you have taken your income and 
paid for investment management. If you start at 4 per-
cent income -- which is what most financial planners 
recommend these days -- you'll need a total portfolio 
return of 7 percent net of investment expenses.

That may seem like a modest number, but you can't get 
it without taking some risk. If your entire portfolio 
was in tax-deferred accounts, you could invest in Trea-
sury Inflation-Protected Securities (TIPS) and have 
about 2.3 percent a year to spend, adjusted for infla-
tion, each year.

But I bet that won't float your boat. If you've earned 
enough to be able to accumulate a $1 million portfolio, 
odds are you'd be seriously inconvenienced by having to 
live on $23,000 a year.

From that point on it's all a matter of choosing how 
to arrange your assets so that you can maximize your 
return, with the least risk. Sadly, it isn't easy to 
get objective advice about this because the financial 
services industry is structured so that it gets the 
most income when you take the most risk -- by investing 
in equities. Worse, I know of no major firm that con-
siders its charges when it tells you how much income 
you can take. The net result is that most people are 
likely to have significantly more risk in their port-
folios than they should have.

Based on historical data, it should be possible to achieve 
a 7 percent total return with a simple mixture of large-
capitalization stocks (such as the S&P 500) and in-
termediate bonds. According to Ibbotson Associates, for 
instance, the long-term return on large common stocks 
has been 10.4 percent annualized, while the long-term 
return on intermediate-term government bonds has been 
5.3 percent. Over the same period, inflation has run at 
an annualized rate of 3.0 percent.



Normal Price: $19.99

Plain and simple this is one heck of a deal. Discounted 
below cost, you'll want to pick up a couple. Makes a
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Briefcase/Laptop Bag


A conservative 40 percent equity/60 percent fixed-income 
portfolio could be expected to produce a long-term ann-
ualized return of 7.34 percent -- enough to meet the 7 
percent total return goal, excluding management expenses. 
Build a traditional balanced portfolio that's 60 percent
equities, 40 percent fixed-income, and the long-term 
annualized return would be 8.36 percent.

If these returns were absolutely steady, life would be 
simple. But the returns vary greatly. A few really bad 
years can do enormous damage to your portfolio -- and to 
your long-term standard of living. That's why your with-
drawal rate is limited.

The only way to cope with this is through portfolio di-
versification, hoping that adding different asset classes 
-- such as international stocks, REITs and life annuities 
-- can (1) smooth the annual return and (2) reduce risk.

No matter how the portfolio is constructed, however, our 
increasing longevity makes it difficult to withdraw more 
than 5 percent a year from our nest eggs. 

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).



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