Skip to main content

For our clients across Colorado, this is the biggest question they face as they approach retirement. Will your money last, our will you outlast your money?

Making decisions about how to save, invest, withdraw, and spend your nest egg has a big impact on your quality of life after you retire.

The following article by Walter Updegrave discusses how investing and using your savings can impact how long your retirement assets will last.

To explore possible strategies with your own numbers, use the financial calculators provided by Jordan Dechtman Wealth Management, including “Will the Money Last?”

If you have questions about your personal retirement savings, contact our retirement planning and investing experts for personal advice.

Request an appointment to talk with our advisors one-on-one in our Centennial office, or call Jordan Dechtman Wealth Management at 303-741-9772.

“Will My Retirement Savings Support Me For 3o Years?”

– Walter Updegrave

What’s the best investing and withdrawal strategy to provide me a retirement income that will last 30 years? –Matt

Clearly, the way you invest your savings and the amount you withdraw each year are both important in determining how long your retirement assets will last.

Invest too aggressively and your nest egg might suffer losses so devastating during a major downturn or a prolonged bear market that it might not recover enough to generate sufficient income even after stock prices rebound. Invest too conservatively and your retirement portfolio may not generate enough capital growth for you to maintain your standard of living in the face of inflation over the course of a long retirement.

The same applies to withdrawals. Pull too much from your savings, especially early in retirement, and you increase the risk that you may run out of money while you’ve still got a lot of living to do. Being more cautious about how much you withdraw can reduce that risk, but it exposes you to another risk — namely, you could end up with a big pile of savings very late in life. That might not seem like such a bad thing, but it might mean that you lived more frugally than you had to early in retirement.

So a good retirement income plan must achieve a balance between how you invest your money and how much you withdraw. That said, when it comes to making sure that you don’t outlive your savings, I contend that how much you pull from savings each year is actually the more important of the two. Which means you want to take special care in setting an appropriate withdrawal rate.

To see why that’s the case, let’s look at a few scenarios involving different investing strategies and withdrawal rates.

Assume you’re 65, have a $500,000 nest egg, 60% of which is invested in stocks and 40% in bonds. And let’s further assume that you want to be reasonably sure that your nest egg will be able to support you for 30 years, or until age 95. If you withdraw 4%, or $20,000, the first year of retirement and then increase that dollar amount by inflation each year — that is, you follow the 4% rule — T. Rowe Price’s retirement income calculator estimates there’s an 80% chance your nest egg will be able to maintain that inflation-adjusted income stream for at least 30 years without running dry.

You would think that investing more aggressively or conservatively might dramatically increase or decrease your success rate, but that’s not necessarily the case. Indeed, for stock allocations from as high as 100% to as low as 30%, the chance of a $500,000 nest egg being able to sustain a $20,000 income — real or inflation-adjusted — for 30 or more years range between 76% and 80%. Not a big difference.

It’s only when you get to very low exposures to stocks — less than 30% of savings — that the success rate begins to drop off significantly at a 4% withdrawal rate.

And contrary to what you might expect, very high stock allocations (80% to 100% in stocks) actually had a slightly lower chance of success than more modest stock allocations (40% to 60%), largely because at some point adding more stocks makes a portfolio much more volatile and vulnerable to market setbacks.

And if you go to a lower initial withdrawal rate — say, 3% — you’ll also find that boosting your stock exposure doesn’t do much to increase your success rate, and high allocations to stock (70% or more) begin to pull your success rate down.

In fact, it’s only when you get to withdrawal rates of 5% or more that lofty stock holdings appreciably boost your chances of success. For example, a nest egg invested in a mix of 60% stocks-40% bonds has about a 55% chance of lasting 30 or more years at a 5% withdrawal rate. Going with a much more aggressive 90% stocks-10% bonds mix will boost your chances of success to just under 60%.

But the question is whether you would consider that rate of success acceptable, as it also means you have a greater than 40% chance that you’ll run through your nest egg too soon. In short, you shouldn’t expect that an aggressive investing strategy will support outsize withdrawals from your savings.

The upshot: As long as you set a reasonable withdrawal rate — say, 3% to 4% — you should have pretty wide latitude for how you divvy up your savings between stocks and bonds. Which means you can likely create a stocks-bonds mix that largely jibes with your tolerance for risk without putting you in too much danger of running through your nest egg too soon.

Test your own numbers using the Jordan Dechtman Wealth Management Financial Calculators.

Keep in mind, however, that these success rates aren’t guarantees. They’re estimates based on how the financial markets might perform in the future. So you should be prepared to be flexible about withdrawals, lowering them if your nest egg’s value takes a hit and perhaps increasing them if outsize gains in your investments causes your retirement account balances to swell.

If you’d like the peace of mind from knowing you’ll receive a payout every month regardless of how the financial markets perform, you can consider putting some (but not all) of your savings into an immediate annuity or a longevity annuity and keeping the rest in a diversified mix of stocks and bonds.

Remember too that the success rates above measure only the likelihood that your savings will last a specific amount of time, in this case 30 or more years. They say nothing about how much money you may have left in your retirement accounts in those scenarios when they don’t run dry. And the fact is that in those instances where your savings do last 30 or more years, a higher stock stake can leave you with a much bigger nest egg late in retirement.

So even if greater stock exposure doesn’t increase the chance that your portfolio will last longer, you might still prefer to tilt your asset mix more toward stocks if, say, you want to leave more money to your heirs or just want to have a bigger cushion to handle higher-than-anticipated medical expenses or other unexpected expenses late in life. Just don’t forget that investing more heavily in stocks also increases the potential for gut-wrenching drops in the value of your savings during periods of market turbulence.

You can see for yourself how different mixes of stocks and bonds and withdrawal rates affect your nest egg’s longevity with financial calculators. If you go through this exercise, I think you’ll find that if you want greater assurance that your nest egg will last as long as you do, your primary focus should be on choosing a reasonable withdrawal rate.

 

This article was written by Walter Updegrave from CNN Money and was legally licensed by AdvisorStream through the NewsCred publisher network.

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Dechtman Wealth Management, LLC [“DWM”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from DWM. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. DWM is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the DWM’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.dechtmanwealth.com.

Please Note: DWM does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to DWM’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Please Remember: If you are a DWM client, please contact DWM, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently.

Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

Join our newsletter

"*" indicates required fields

Name*
This field is for validation purposes and should be left unchanged.