Your Retirement Income Stream
Forgive me for repeating myself. But this is REALLY important! This issue has to do with how much you can safely withdraw from your portfolio in retirement. You've worked hard and have built up a substantial sum and now you want to spend it. How much should you withdraw to support your retirement lifestyle?
Traditionally, as described in my summer, 2013 newsletter, that number has been 4% over a 30-year retirement, as developed by W.P. Bengen 1994 and later. That is, in that first year of your planned withdrawals, you can withdraw 4% and increase the amount each year for inflation.
Unfortunately, these results have recently been called into question for being too optimistic. The issue was discussed recently in the Wall Street Journal, July 18, 2016, "Views on Rethinking How You Save for Retirement."
Some problems with the 4% rule
- The studies use index returns and do not take fees into account, which many retirees pay to help them through the retirement maze and to manage their money. Please note that it is not possible to invest directly in an index.
- Another factor is that the returns in the studies reflect the US market going back over the 20th century. These were great years indeed for the US, but what about other countries? Clearly, that was not the case for Europe, which endured two wars on its territory, along with the great depression. Past performance does not guarantee future market performance or success.
So, these experts are proposing lower numbers for a withdrawal rate, even as low as 2 to 3% per year.
- Life expectancy continues to increase and there is at least a chance that the advances in medical science will enlarge the rate at which those increases take place. In other words, we may plan to live to 90, but may in fact live to 100. This puts additional strain on our resources.
- Finally, Bengen's original study took place at a time when interest rates were much higher. So, if you are invested in a 60/40 split with 60% stocks and 40% bonds, the new concern is not over the portion that is in stocks, but rather the portion that is in bonds. If that bond portion had been providing a 5 to 6% rate of return, but now only provides a 2 to 3% rate, or worse, this will drag down the overall performance of the portfolio significantly.
The Monte Carlo analysis tool
This is where Monte Carlo analysis can help. This statistical technique runs sample portfolio returns and provides the "likelihood of success" of your plan. The results are in percentages: thus, a "score" of 90 indicates a 90% likelihood of success. So it will show you the likelihood of success of the 4% withdrawal for your scenario. If you find that likelihood too low, we can adjust your plan accordingly to take out less money. The risk you take is up to you, but isn't it better to take a calculated risk?
Help sustain your assets
Now I'll let you in on a secret. Click here for a rundown of potential withdrawal percentages as determined by T. Rowe Price. This is a useful guide, but no substitute for an actual plan created with the assistance of a professional.
Selected Articles on this Topic
Thomas Phelps DeVol is the founder of DeVol Insurance & Financial Services. He enjoys helping people transform their hopes about the future into attainable retirement plans. His persistence, know-how and diligence are the keys to his success -- and that of his clients.
Tom has three children and lives with his wife, Connie, and their youngest child in Newton, Massachusetts. He enjoys gardening, tennis, jogging and opera.
Tom can be reached at 617-964-6404 or via email.
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