Hitting ‘the Number’ in Retirement

I’m going to hit the number this year — the one that people often associate with retirement. To be clear, I am not retiring this year, but when retirement is closer than it used to be, there are a few more numbers that command your attention.

There’s your portfolio balance: the investments, savings, and IRA/401(k) balances that you’ve been building up all these decades. There’s the amount of money you pull from your portfolio each year for your expenses. And then there’s the number of years you need your money to last.

Number 1 – Your portfolio

While you are working, you contribute to your IRA or 401(k), maybe with a company match; if the markets are flat or up, your balance is increasing as no withdrawals are taking place.

But once you retire, you turn off the spigot of a regular paycheck, and you turn on the spigot to your IRA or 401(k). Now, your account balance will rely even more on the markets, as contributions and company matches have stopped. It will also be drained a little bit each year by your withdrawals. Said another way, that account balance is a moving target.

Number 2 – Your withdrawals

A common guideline is to withdraw 4% to 4.5% of your portfolio balance every year to live on. We’ve had some really strong market returns over the last few years, making it easy to follow the rule. But 2018 so far has been up, down and sideways.

Consider these two scenarios:

  • A $1,000,000 portfolio that gains 6% in a year will total $1,060,000. If you take out 4.5% of your expanded balance, you are withdrawing $47,700, and your portfolio still comes out ahead, at $1,012,300.
  • However, if a $1,000,000 portfolio experiences a 10% selloff in a year, your balance declines to $900,000. Your 4.5% withdrawal comes out to only $40,500, which takes your balance down to $859,500.

Will you have the discipline to stick to a 4.5% withdrawal if it means less money to live on each year?

Number 3 – Your lifetime

How many years will you need your money to last? If you retire at 65, you could need your savings to last 20 or 30 years. Furthermore, do you want to “die broke,” as some people advocate, or do you want to leave something for your heirs?

I’ve written in the past about taking an “endowment fund approach” to your retirement portfolio to boost your odds of not outliving your income and assets.  Endowment funds by definition follow a sustainable, multi-generational approach to investing — using a broad range of equities, fixed income and alternative investments — and have policies that make sure the portfolio rebalances its various asset classes on a regular basis.

Related: Perfect Investment to Protect Cash