Jan. 23, 2014, 5:00 a.m. EST
IRS unwittingly gives retirees a great drawdown tool

Retirees are continually worried about how long their remaining savings will last — particularly when they get hit with some unforeseen financial event that might come from a year with bad market conditions or a relative in desperate need of support.
Further, inflation always takes a big toll on retirees, often forcing them to use more money than forecast.
The amount a retiree can spend from savings depends on both how long the savings will be needed and the return earned on savings. The important measure for savings is the real return, that is, return less inflation. Theoretically Savings I Bonds and TIPS should produce a small but safe real return, but current premiums, low coupons, and income taxes leave them short of even a zero real return.
Getting larger real returns than zero requires adding some higher risk securities to a retirement portfolio. A common recommendation for retirees is to allocate 40% of a retirement portfolio to stocks. A portfolio of 40% S&P 500 stocks, 50% AAA corporate bonds, and 10% money markets would theoretically provide a return of about 8% using post 1965 averages. Reductions from investment costs and reverse dollar-cost-averaging (reverse DCA) would bring this down to about 6% and inflation that averaged 4% over those same years would give a real return of about 2%. If in a taxable account, 1% more might be lost to taxes. [more]

IRS unwittingly gives retirees a great drawdown tool - MarketWatch