It's Only Money's wise readers, understandably, expect a lot of their columnist.
This week, they strike back with several suggestions – demands, really – for improvements on past columns.
So, without further ado:
Better clarity
Last month, Mark Downing of Happy Valley sent me an email with the subject: "Your math is suspect!"
The message followed my June 15 column in which I estimated the retirement income of a 40-year-old woman with $400,000 in her IRA. I assumed she saved $500 a month through age 66 and compared the results when she earned a return of 7 percent vs. 6 percent a year.
"You state she would run out of money at age 96. My math says she would NEVER run out of money, assuming anything over a 4.75% return. With your assumed 6% annual return, at age 96 she would have over a million in her account. Please explain what I am missing."
What he missed was something I failed to disclose: The figures in my example were adjusted for assumed rates of inflation and taxes. I assumed inflation would average 3.5 percent over her lifetime, eroding the purchasing power of her portfolio. I also assumed a tax rate on withdrawals of 20 percent.
If I hadn't adjusted the figures for inflation, as reader Tom Barton of McMinnville pointed out, she would have at least $2.7 million at age 66.
Here's why I offered inflation-adjusted and tax-adjusted numbers. It's simply easier to relate to today. The $2.7 million figure sounds like a lot of money. But if inflation averages 3.5 percent for the next 26 years, that amount will buy what $1.1 million buys today.
I adjusted for taxes because most people budget for their spending on an after-tax basis. But others might think in gross income, so I can see why that could be confusing.
Better examples
Andrew Swanson of Clackamas offered another criticism of that column:
"I'm 46 years old. I doubt there are very many 40 year olds in Oregon who've already saved that much in dedicated retirement accounts! So I encourage you, in future columns, to use more common figures ... like a 40 year old with $100,000 set aside for retirement in retirement accounts."
Said Tom Barton:
"To quote such miserable results would, I must assume, discourage many of your readers from planning for their retirement."
So, let's try Swanson's number, again using AnalyzeNow.com's Free Retirement Planner program.
A 40-year-old with $100,000 in her IRA who saves $500 a month until retirement at age 66 would end up with more than $1 million at retirement, assuming the IRA earned 7 percent a year.
In retirement, if she re-invests her IRA more conservatively and earns 6 percent a year in retirement, she could afford to withdraw $6,000 a month before taxes and not exhaust her IRA until age 95.
Again, that sounds comfortable. But if we adjust those figures based on an inflation rate of 3.5 percent, it's not as comfortable. We get a nest egg of about $480,000 at retirement, according to AnalyzeNow. She can safely withdraw about $1,950 a month in today's dollars before exhausting her money at age 95.
These results will vary widely depending on the rate of return and inflation we use. But that's the best we can do – make a lot of assumptions and make them conservatively so we have a better chance of being right about the future.
Better records
In response to my recent columns on the anatomy of my Roth IRA, Larry Roberts of West Linn wrote:
"You twice noted 'I can't recall....' why or why not you took an specific action in your portfolio.
While I am not a professional investor, I do have a CFA, was a partner at a once well-known investment-banking firm, and I manage my own accounts, two endowment funds and a trust.
When I take an action in any of the portfolios, I make a note identifying why I took the action and the intended consequences. Then I review the action in 6 months and again after a year. Also keep the notes for 10 years. Helpful to me."
Good suggestion. MarketWatch columnist Chuck Jaffe, in a recent column on how he picks his mutual fund investments, wrote: "My file on any new fund starts with a detailed list of factors that led to my decision, making it easier years from now to answer the question 'Would I buy it again today?'"
-- Brent Hunsberger is an Investment Adviser Representative in Portland. For important disclosures and information about Brent, visit ORne.ws/aboutbrent. Reach him by email or leave a message at 503-683-3098.