I was recently challenged by an investor couple attempting to determine the amount of annual spending they can make based on their portfolio. How, they asked, can we make a rational decision when we do not know the future return in investment markets, the future rate of inflation or their life expectancy?
My general rule of thumb has been to take no more than 4 to 5 % of the portfolio per year. For many of my clients this translates to having an investment portfolio around $2 million in addition to social security in order to maintain the life style they are comfortable with. A five percent withdrawal rate would be the maximum unless the time horizon is under 20 years. For purposes of determining life expectancy, I generally use age 95 unless the client suggests otherwise. This assumes a portfolio with a 50/50 split between stocks and bonds.
Sometimes clients prefer to use a set monthly dollar amount for a withdrawal, such as $7500 per month, and annually adjust this amount as needed to pay expenses. This disadvantage of this approach is if financial markets decline significantly, we need reduce the monthly amount.
I have recently read an excellent article by Jaconetti and Kinniry that serves as a useful reminder of the factors to consider and how best to balance competing retirement goals.
It is important to annually review your spending strategy and your investment portfolio with your investment advisor.
Other articles filed under Retirement
February 23, 2018
It’s tax time again and as you gather your W2s, 1099s, and maybe even your K-1s, we thought it would be a good time to explain our income tax planning approach. Income tax planning is a crucial aspect of the...
February 7, 2018
Yesterday evening, Rockbridge's own Ethan Gilbert, CFA was featured on our local Spectrum news network. Check out the interview below where Ethan discusses the recent market shifts, how these swings can affect your retirement accounts, and how to protect your...
January 24, 2018
This past weekend, the New England Patriots did it again. Down 10 in the 4th, star quarterback Tom Brady orchestrated two scoring drives to pull off another comeback victory. In two weekends, the Pats will try to win their 3rd...
January 23, 2018
Stock Markets Returns from various stock market indices over several periods ending December 31, 2017 are shown below. The past quarter was good for stocks – REITs lagged. Over the past year, returns from stock indices, especially emerging markets, were...
January 19, 2018
Happy New Year! Now that 2017 is a wrap, one of the best presents you can bestow on yourself and your loved ones is the gift of proper preparation for the rest of the year. Want to get a jump-start...