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Hopeful about retirement

By Barbara Whelehan ·
Friday, March 14, 2014
Posted: 5 pm ET

In a Bankrate poll conducted five years ago on the heels of the financial crisis, 7 out of 10 American workers said they plan to work through retirement, either because they like to work (39 percent) or because they'll need the money (32 percent).

Bankrate's latest study gives hope to those who might want to enjoy a leisurely retirement instead. In the study, we looked back to see what would have happened to a retiree's million-dollar portfolio over 20 years, assuming $40,000 annual withdrawals, bumped up 3 percent a year to account for inflation. In one scenario, the portfolios invested 60 percent in equities and 40 percent in bonds -- the Barclays U.S. Aggregate Bond Index in each case.

For the equity component, we looked at three different types of equity funds: 1) the average performance of actively managed equity funds with a 20-year track record; 2) the Standard & Poor's 500 index and 3) the S&P Dividend Aristocrats. The latter index consists of the 54 companies in the S&P 500 that have raised dividends in each of the past 25 years.

Guess which portfolio had the most money at the end of the 20-year time frame? I'll cut to the chase and tell you outright: It was the Dividend Aristocrats/bond portfolio. After withdrawing $40,000 plus the 3 percent each year, the portfolio ended up with $3.4 million.

"It speaks to the importance of dividends as a component of investors' overall return," says Bankrate chief financial analyst Greg McBride, CFA, who ran the numbers for the study. "And this is significant for investors of all ages, both those accumulating their retirement portfolios and those living off it. Don't ignore slower-growing stodgier companies because they're those most likely to pay and, just as importantly, increase their dividends over time."

What about those equity income funds?

Equity income funds also generally invest in companies with rising dividends over time, but it's hard to predict which ones will be the winners in any particular year. Among the 62 funds with a 20-year history, in 2013, for example, returns ranged from 18 percent for Copley Fund to nearly 40 percent for Hotchkis and Wiley Large Cap Value. In 2008, the year the stock market fell through the floor, Fidelity Growth & Income lost nearly 51 percent (compared with a loss of 38 percent for the S&P 500) while Copley Fund fell nearly 16 percent. I'm picking the outliers for both years.

In the study, we also looked at another time frame -- 2000 through the end of 2013 -- because that period encompassed the two biggest bear markets in recent memory. How did these portfolios get through all that? And finally, we looked at what would have happened if the portfolios had a more conservative allocation: 40 percent equities and 60 percent bonds. Want to see the results? Read Sheyna Steiner's excellent analysis in her story, "Best retirement funds for the duration."

Another jolting finding: Though the withdrawals increased at only a 3 percent annual rate, the amount withdrawn was significantly higher at the end of the 20-year period. In 1994, the withdrawal amount was $40,000 followed by $41,200 in 1995, etc. By 2013, the withdrawal amount had grown to $70,140. So even though 3 percent seems like a benign annual inflation rate, it significantly impacts our cost of living.

Nevertheless, the results of the study give me hope that, for those who take retirement planning seriously, it is possible to enjoy a leisurely retirement and not run out of money.


Follow me on Twitter: BWhelehan.

Barbara Whelehan is a co-author of "Future Millionaires' Guidebook," an e-book by Bankrate editors and reporters. It is available at Amazon, Barnes & Noble, iBookstore and other e-book retailers.

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