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Dr. Don Taylor, CFA, Bankrate.com advice columnistFiguring out a retirement income

Dear Dr. Don,
I have a net worth of $3.5 million. I am 51 years old, own my home and have no debt. I live in the Midwest so my cost of living is much less than on the coast. If I retire now, what return should I plan on from my $3.5 million in investments?
-- Chris Compounding

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Dear Chris,
You asked me what you can expect to earn on your portfolio. That's the easy question. The hard question is how to invest this money to meet your needs in retirement, from health care to long-term care and living expenses, so you don't outlive your money.

I'll make a leap and assume that all $3.5 million is in investable assets that can earn a return even though that doesn't have to be the case when calculating your net worth.

Net worth is simply an accounting of what you own less what you owe to arrive at what's yours. Readers who want to calculate their wealth can use Bankrate's net worth calculator.

What you can plan on in income from your portfolio depends on how you invest it. You could invest very conservatively with little to no risk to principal and expect an average annual pre-tax return of 4 percent to 5 percent, or take on some additional risk by investing in common stocks, corporate bonds and other investments and get higher expected average annual returns, let's say from 7 percent to 10 percent.

Paraphrasing Nobel Laureate William Sharpe, you can't eat average compound returns. Expecting your portfolio to earn 7 percent to 10 percent doesn't keep you from losing money in any given year. Simulation models can show how a few down years early on in retirement make it that much harder to meet your income requirements in later years.

If you're from the never-touch-principal school of investing, you could invest in the 30-year U.S. Treasury bond, earn roughly 4.7 percent pre-tax on that investment and make $164,500 per year in investment earnings, which translates into $13,700 per month.

Put that money into an immediate annuity instead and you could receive over $18,000 per month in income with a single life annuity, with no beneficiary payments. There would be no principal balance at your death, but you wouldn't outlive the income stream. Tweaking the annuity policy to consider joint lives or a guaranteed payment stream changes that number but still provides for a lifetime income stream.

While immediateannuities.com can let you design an immediate annuity that's right for you, provide you with a nonbinding quote and no salesperson will call, I like Vanguard's no-obligation quote on its Web site because it also offers an inflation indexed annuity.

Whether your employer has retiree health care benefits in place and keeps them in place until you qualify for Medicare should influence your portfolio decisions, as will the need for long-term care insurance.

Take a bigger-picture approach to managing your retirement nest egg to make sure that it funds your needs for a comfortable retirement. If I were in your shoes, I'd talk to a financial planner and work on the big picture. An earlier Dr. Don column talks about choosing a financial planner.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & investing" or "Money."

Bankrate.com's corrections policy -- Posted: March 30, 2006
More Q&A stories from Dr. DonAsk a question
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