By: Jesse Anderson
Conventional advice says that you can withdraw 4% of your portfolio each year in retirement. Financial advisors have traditionally relied on this simple rule of thumb; however, for most investors 4% just is not enough. We all know that times have changed.
The 4% rule comes from a complex formula running the historical performance of different investments through multiple simulations and assumptions. The goal is to maximize the withdrawal rate without running out of money before death. The biggest problem with the calculation is the use of “traditional investments”. These are strategies that don’t focus on income and aren’t seeking to increase the monthly paycheck a portfolio can produce.
Our clients come to us with two goals. First, they want to have enough income to live comfortably without worry in retirement. Second, is to make their money last.
Living comfortably means that trying to live on 4% may not be enough. Most of us want to live comfortably in retirement and expand our lifestyle – not cut our standard of living.
Let’s look at an example. Suppose you have decided to retire at 65 and have saved $1,000,000. With the 4% rule, you would withdraw $40,000 per year (pre-tax) to live on. If you pay 25% in taxes, you are now left with $30,000 per year to live on. If you saved a million dollars for your retirement, then adjusting your lifestyle so you can be supported with $30,000 per year just won’t work. The 4% rule is not enough.
The 4% rule cuts into your principal. How can it last?
As we get older, we are more aware of our savings; along with our desire to keep it intact and make it last.
However, with the 4% rule and traditional investments you may be spending down your nest egg. What happens if you want to leave a legacy or live longer than expected? (Nearly all the retirees I work with significantly underestimate how long they will live!) And, what happens if the cost of living, taxes, or healthcare costs increase? Four percent won’t be enough. It will leave you with a standard of living well under what you were used to.
If your objective is to withdraw money from your portfolio, then your focus needs to be on how your investment portfolio can produce consistent cash flow.
The goal of your investment strategy should be to create income that increases over time (that keeps up with inflation), does not cut into your principal, and helps you maintain your standard of living. The Snider Investment Method seeks to move the withdrawal rate from a portfolio beyond the standard 4% norm.
Our Snider Investment Method Workshop will help you learn a better strategy to create a paycheck from your portfolio. To learn more about our next workshop, please sign up for updates here: http://www.snidermethod.com. Workshops are held during limited dates during the year.