Investment Portfolio
"She got the gold mine, I got the shaft."
Sung by Jerry Reed
Sung by Jerry Reed
Boomer Retirement - Baby Boomers (Born 1946-1964)
So, what ever happened to “Happily Ever After?” If you’re a Boomer, you recognize this movie tag line from the 1950s and 60s. At the end of every romantic movie a background voice would always say, “And they lived happily ever after.”
But for Boomers, living happily ever after is more about money than it is about love. The thing that keeps Boomers up at night is the tormenting thought that their money may not last as long as they do. So understanding and maximizing the income potential of your Investment Portfolio is one of the keys to your own personal Happily Ever After.
Investment Portfolio - The 4% Rule Revisited
Whether you’re already retired or in the final countdown, no doubt you’ve wondered how your investment portfolio will stand up to the strain of a 25 year retirement. Things like low rates-of-return, inflation and periodic withdrawals will all put stress on even the most carefully crafted portfolios. So, how much is a safe withdrawal percentage from an investment portfolio that may need to last a quarter century or longer? We’ll get to that, but first there are a few things we need to talk about.
Accumulation Phase
You’ve probably heard the old adage, timing is everything. And from an investment standpoint, it’s certainly true. Financial advisors call it the sequence of returns. During a 30+ year accumulation phase of building your retirement nest egg, the sequence of positive and negative returns in a market filled with roller coaster highs and lows, doesn’t much matter – at least historically. Having a diversified portfolio and staying invested throughout the entire period does though.
Distribution Phase
However, during the distribution phase, when investment theory magically transforms into retirement reality, the sequence of returns is everything. And bad timing can be devastating to the long term survival of your retirement nest egg. Here’s the thing: When you actually flip the retirement switch, you don’t know if you’re doing it at the best of times or the worst of times until several years later. And if you’ve guessed wrong, the effect on the rest of your life can be ruinous.
Living on a Fixed Income
When you’re living on a fixed income you can only control two things – the amount of and the timing of your portfolio withdrawals. Everything else the economy and markets deliver, from the spectacular bull market in the 1990s to the depths of despair ushered in by the bear market of 2000, is beyond your control. So don’t try to time the market, go with the flow of the market.
Withdrawal Rates
Now back to withdrawal rates. So, how much is a safe withdrawal percentage from an investment portfolio that may need to last a quarter century or longer? Numerous studies have been undertaken by major investment companies including Vanguard and T. Rowe Price as well and independent investment research organizations. All employed Monte Carlo simulation in drawing their various conclusions. (Monte Carlo simulation is a method which attempts to replicate the unpredictably of the real life ups and downs of the stock market and their effect on your investment portfolio using thousands of different scenarios to forecast the probability of your portfolio lasting as long as you do.)
The 4% Rule
Virtually all of the studies conclude, based on historical evidence, that you stand a reasonably good chance of having your portfolio last 25 years if your annual withdrawal percentage is somewhere between 4% to 5% of its starting value. (The T. Rowe Price study concluded that a portfolio consisting of 60% stocks and 40% bonds offered a 94% probability of lasting 25 years or more.) Some of the prognosticators recommend taking a level percentage from your portfolio’s beginning value, say $40,000 to $50,000 per year on a $1 million dollars. While others adjust withdrawals for inflation. Still others take a wait-and-see approach making adjustments each year based on actual market and inflationary conditions. So, what’s the right answer?
Real Life Experience
In my professional practice, where hundreds of real life scenarios played out over a span of 40 years (not Monte Carlo simulations), I came to this conclusion: A modified 4% withdrawal strategy worked well for our clients. Here’s what I mean: Starting with a $1 million portfolio, take $40,000 annually in monthly withdrawals of $3,333 or quarterly withdrawals of $10,000. Each year the withdrawal percentage would remain the same however the amount would fluctuate based on a recalculation of the portfolio’s value at the end of each year. This means that the dollar amount of the 4% withdrawal could be larger or smaller than the year before. Repeat as long as your nest egg lasts – hopefully, longer than you.
So what does all of this mean to you? Maybe nothing since this is not a recommendation - it’s merely one man’s professional experience with a few hundred families. The right decision for you is based on your personal goals, objectives and circumstances made with the advice and counsel of a qualified financial advisor of your choosing.
Real Life Experience
In my professional practice, where hundreds of real life scenarios played out over a span of 40 years (not Monte Carlo simulations), I came to this conclusion: A modified 4% withdrawal strategy worked well for our clients. Here’s what I mean: Starting with a $1 million portfolio, take $40,000 annually in monthly withdrawals of $3,333 or quarterly withdrawals of $10,000. Each year the withdrawal percentage would remain the same however the amount would fluctuate based on a recalculation of the portfolio’s value at the end of each year. This means that the dollar amount of the 4% withdrawal could be larger or smaller than the year before. Repeat as long as your nest egg lasts – hopefully, longer than you.
So what does all of this mean to you? Maybe nothing since this is not a recommendation - it’s merely one man’s professional experience with a few hundred families. The right decision for you is based on your personal goals, objectives and circumstances made with the advice and counsel of a qualified financial advisor of your choosing.