stock market outlook

L1: stock market outlookGfw, I read your report “How much can you safely…” and wonder what is your opinion about this article in which Warren Buffet predicts stock market return may be only 7% for the next decade or two:http://www.fortune.com/indexw.jhtml?channel=artcol.jhtml&doc_id=205324Plus, I found this interesting too:http://www.forbes.com/forbes/2000/0529/6513082a.htmlIf one designs a SEPP without understanding the long-term outlook for the stock market, he may run out the money before he realizes it. 2002-04-22 14:45, By: sonny, IP: [127.0.0.1]
L2: stock market outlookSonny:You question raises a very interesting dilemma; or really a 2nd question about SEPPs. Most of our discussion here has been about the tactical & mathematical implimentation of SEPPs; e.g. how do I get the money out before age 59 1/2 without paying the 10% surtax. Generally, this is easily accomplished with some knowledge and care.But, let’s take proverbial Bob with a $1mm IRA, age 50 who chooses the annuity method @ 7% thus generating an annual distribution of $82,790. Further, Bob did this becuase he really needs $80k a year to survive in the manner to which he is accustomed. Bob is now over the mathematical SEPP hurdle but faces a much more serious 2nd question which really has two parts or two time horizons: one, what rate of return must Bob earn to make the IRA last to age 59 1/2 so he doesn’t have to pay the surtax; two, what rate of return does Bob need to earn to make his IRA last his lifetime?The short term answer is in the neighborhood of -4%. Not bad. Bob can afford to lose 4% every year for the next 10 years and still make the finish line from the IRS perspective.The longer term answer is much more difficult. Let’s say Bob will make to age 85. If so, he must earn 8.5% per year to make the IRA last without adjustment. If we put in a 3% per annum COLA on Bob’s withdrawals, his rate of return jumps to just shy of 12%.If as you suggest, we only achieve 7% returns for the next 10 – 20 years, Bob starts flipping burgers at Micky D’s for 65th birthday because his IRA is exhausted. My point here is not to suggest a definitive answer but rather to introduce the whole subject of portfolio survivability. If Bob’s $1mm IRA is essentially all he has, then he should not even start the SEPPs at $82k per year becuase his probability of surviving the IRS is very high; his probability of going broke before death is also extremely high; not a good place to be. On the other hand, if Bob has other material assets or has a $100,000 per year pension that kicks in at age 62; then Bob is in much better shape.SEPPs should be thought of as a tactical tool as part of an overall strategic plan to avoid extra taxation; SEPPs are not an end of themselves.TheBadger 2002-04-23 08:31, By: TheBadger, IP: [127.0.0.1]