Retirement Strategy: When Can You Cash Out?

by: Regarded Solutions

Before I get into the crux of this article, let me make it very clear that I am a fervent believer in dividend growth investing. As evidenced in our "Team Alpha" portfolio, right here on Seeking Alpha, we have shown how effective this strategy can be. Over the last 10 months, our portfolio is up by roughly 24% (review results right here).

Our portfolio now consists of; Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), AT&T (NYSE:T), General Electric (NYSE:GE), Annaly Capital (NYSE:NLY), Southern Company (NYSE:SO), Procter & Gamble (NYSE:PG), Intel (NASDAQ:INTC), Realty Income (NYSE:O), Coca-Cola (NYSE:KO), Bank of America (NYSE:BAC), American Capital Agency (NASDAQ:AGNC), Wal-Mart (NYSE:WMT), Cisco (NASDAQ:CSCO), 3M Company (NYSE:MMM) and Bristol-Myers Squibb (NYSE:BMY).

I think a portfolio of this nature can be a financially sound strategy for anyone who seeks income as well as growth for a more secure future. That being said, what if you have decided that you've had enough and you never want to see another stock for the rest of your retirement years?

When Can You Cash Out?

There are no easy answers to this, and everyone has a unique situation. I have said repeatedly; investing in large cap, blue chip, dividend paying stocks, is the most reliable way to have a more secure retirement. It is certainly not without risks. Investors need to be vigilant and do their homework. The rewards do not happen in a vacuum.

I also realize that there are millions of folks who neither have the time, nor the inclination to keep up with the world of investing. Others have simply had it and just want to have absolutely no risk.

I recently read an article on Yahoo! Finance, which I found amusing, but dismissed it. You can read the article right here, and draw your own conclusions. Actually, another author right here on Seeking Alpha wrote an article on this very same Yahoo piece. You can review that one here as well.

The author was much more taken aback than I am, and that's fine, but I have come to realize that there could be folks reading my articles who might feel that there is something to the Yahoo article's theory. In essence, it explains how folks who have already saved enough money for their golden years should not take any more risks and to focus on capital preservation. The article suggests short-term Treasuries, CDs, and even annuities, to pay for the next 25 years of life after age 65.

I got to thinking that if I just did a few calculations (on a retirement calculator from Smart Money), everyone can see exactly how much money they could "get" from a portfolio by doing absolutely nothing, and/or just keeping the money in bank savings accounts. The time frame I used was 35 years, which for anyone retiring at age 65, would bring them to age 100.

I also plugged in a 3% annual inflation rate, and just 2 rates of return; zero and 3%. (3% in a bank savings account might sound ridiculously high right now, but in a few years it might be ridiculously low)

Here is what I came up with:

Portfolio Value 1,000,000 500,000 250,000
Years Required 35 35 35
Rate Of Return 0 0 0
Inflation Rate 3% 3% 3%
Max Withdrawal Amt 16,539 8,270 4,135
Click to enlarge

No rate of return, 3% inflation annually, and 3 different portfolio values. The bottom line shows the amount you could take out every year for 35 years adjusted for inflation.

Since everyone has different expenses, it makes no sense to just make up numbers. Just take the withdrawal number that is close to what you can expect, add your social security and any pensions you might have and you could easily see if this works for you.

Here is the same chart but with a 3% return which would offset inflation:

Portfolio Value 1,000,000 500,000 250,000
Years Required 35 35 35
Rate Of Return 3% 3% 3%
Inflation Rate 3% 3% 3%
Max Withdrawal Amt 28,371 14,286 7,143
Click to enlarge

Obviously, by offsetting inflation by just putting money in bank savings accounts, the numbers are significantly better.

That's it. Take a look at your own expenses. Take a look at each of these little charts, and see if you can actually "do it." If that is the retirement you want, then who am I to say that this approach is "wrong."

My Opinion

Not only do I believe in the dividend growth investing philosophy, but I also subscribe to the "die broke" philosophy. For me, I prefer a lifestyle that affords me the ability to achieve the luxuries I place value in for my retirement, and I intend on spending every penny.

Some folks just want to be able to pay the bills with every penny.

The choice is yours, but at least now you have something to actually look at.

Disclosure: I am long XOM, JNJ, GE, T, NLY, O, BAC, KO, SO, INTC, CSCO, AGNC, MMM, BMY, WMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.