Q: How long will that nest egg last?

A: That depends on return, inflation, and withdrawal rate.

One of the most critical questions facing many investors is whether the assets set aside for retirement will last as long as they are needed. Because a shortfall in retirement funds can lead to a severely lowered standard of living, or worse, understanding the math is crucial.

Three factors determine how quickly a nest egg depletes — the rate of return that the portfolio earns, the inflation rate, and the withdrawal rate. An investor can only control the third — how much of the portfolio is sold each year to meet cash flow needs.

Small changes in withdrawal rate can have a huge impact. As the chart above demonstrates, an investor with a 50% stock - 50% bond portfolio withdrawing 9 percent of initial portfolio value each year (adjusted for inflation) beginning in 1973 would have run dry during 1981. However, reducing the withdrawal rate to 5 percent keeps the cash flow stream alive to mid-1994 — an extra 13 years.

Prepare for the unpredictable
These timeframes reflect the unpredictable market conditions investors must prepare for. Stiff inflation in the 1970's and early 80's sharply cut portfolio value. By the same token, strong market returns later in the 80's greatly prolonged the cash flow stream, but only in the case of the 5 percent withdrawal rate; it was already too late for the 7 and 9 percent withdrawals.

With increasing life expectancies, retirement now lasts thirty or more years for many. As it impossible to predict what market returns and inflation will do over such an extended period, we recommend building as large an investment nest egg as possible through indexing, and keeping the one controllable variable — withdrawal rate — as low as possible.

Next time: Which business network should investors watch?

Contact: John Osbon 617.217.2772 josbon@osboncapital.com

Osbon Capital Management, LLC ("Osbon") is an SEC registered investment adviser with its principal place of business in the Commonwealth of Massachusetts. Osbon and its representatives are in compliance with the current notice filing requirements imposed upon registered investment advisers by those states in which Osbon maintains clients.

This hypothetical case represents a portfolio of 50% stocks and 50% bonds, with the investor retiring on December 31, 1972. The retiree takes distributions each year equal to 5, 7 or 9% of the initial portfolio value ($1 million), adjusted for inflation. Each portfolio is rebalanced monthly. Stocks in this example are represented by the Standard & Poor's 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general. Bonds are represented by the five-year U.S. government bond and inflation by the Consumer Price Index. An investment cannot be made directly in an index.

Any historical returns are not net of advisory and/or other fees and expenses. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this Q&A will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.

For additional information about Osbon, including fees and services, send for our disclosure statement as set forth on Form ADV using the contact information herein. Please read the disclosure statement carefully before you invest or send money. For information pertaining to the registration status of Osbon, please contact Osbon or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov).