Undoubtedly, the best time to retire is when you have accumulated more than you need.
But that’s not possible for everyone, and today I’ll show you how to retire with savings that aren’t necessarily as much as you’d like.
This is part 5 of a series of articles on what I consider to be a boot camp for 2023 investors.
The first installment was the best way to invest for retirement.
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The second was the Seven Simple Portfolio that has outperformed the S&P 500 for over 50 years.
Third was how to control your investment losses.
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· The fourth was how to turn small money into big money later—and why you should invest beyond the S&P 500.
Today our main focus is on how you will plan your withdrawal. It involves balancing how you invest, the kind of lifestyle you lead and how much you withdraw every year. Every dollar matters. Every decision matters.
Your top priority should be to avoid running out of money before life ends. Because you don’t know how long you will live, assume it will be a perfect old age.
In short, you need a plan.
For the sake of this discussion, I’m going to assume that you’ll need to withdraw a certain amount in the first year of your retirement, then increase that amount each year to keep up with real inflation.
Though I don’t know how much amount you would need for one year of retirement, we can discuss it in percentage terms.
Financial planners often recommend annual withdrawals of 3% to 5% of your portfolio’s value. If you can meet your needs by withdrawing 3%, you are unlikely to run out of money.
Based on history, an exit rate of 4% will probably be sustainable. However, if you need to withdraw 5% every year and adjust for inflation, your portfolio may not last as long as you’d like.
Over the years I have published and updated a set of tables showing hypothetical year-over-year results (starting in 1970) from various portfolios and withdrawal rates.
you can use this table To see how much of your portfolio you should plan to withdraw each year.
When you’re planning your retirement distributions, you have two main variables under your control:
What percentage will you withdraw each year;
How your portfolio is invested.
To get started, open the link above and scroll down to the third page, Table D1.5. You’ll find 10 columns that show year-to-date portfolio values for various combinations of bond funds and the S&P 500 SPX,
In this table, we assume that you took out $50,000 (5% of your portfolio) in 1970 and then adjusted that amount each year to keep up with real inflation.
Scroll down and you’ll quickly see that – in the early 1990s – these portfolios could not keep up with the growing demands for annual withdrawals.
Now refer to Table D1.4 based on taking out $40,000 instead of $50,000 in your first year of retirement.
With that low withdrawal rate, your money will easily last many years longer than most people spend in retirement.
Table D1.3 shows the effect of a 3% withdrawal (which never came close to being out of money), while Table D1.6 shows a 6% withdrawal (which ended in less than 20 years).
Luckily, you’re not limited to those options. As I mentioned, the investments you choose will make a big difference.
First, of course, is the delicate balance between equities, which will help your portfolio grow over the long term, and bond funds, which will contribute to your peace of mind.
Second, as you can see if you scroll down through the tables, your results can be quite different if you diversify your equities beyond the S&P 500.
Tables D9.3 to D9.6 show the results of using a popular US four-fund strategy. This involves dividing your equities into equal parts: S&P 500, large-cap value stocks, small-cap blend stocks, and small-value stocks.
Table D9.5, for example, shows that the combination would have supported 5% withdrawals for 40 or more years of retirement, as long as you had at least 30% of your money in equity.
When your equity was limited to the S&P 500, there was no combination that even came close to doing this.
Other tables show results for equity combinations that in some cases significantly outperformed the S&P 500.
If 40 years of retirement is your standard, you can achieve this by substituting the US Small-Cap Value Fund for the S&P 500 and taking substantially higher distributions (scroll down to Tables D12.5 and D12.6). .
Although future returns will not be the same as those from 1970 to 2022, the relative strengths and weaknesses of these portfolios are likely to persist.
There are two key points to remember here:
Whatever your portfolio size, consider diversifying your equities beyond the S&P 500.
No matter how much or how little money you have available to spend, you will benefit if you can live a little below your means. Your retirement will be less stressful if you build in a cushion to deal with unexpected needs and opportunities that will surely arise.
In half a century of helping investors, I’ve concluded that the best thing you can do is to start your retirement with as much money as possible. A few years ago, in this article, I argued that many people could effectively double their retirement income by postponing the start of retirement by five years.
Over the years, these tables have helped thousands of investors plan their finances in retirement. But if all these numbers seem daunting, you may find it worthwhile to discuss them with a trusted financial advisor who doesn’t have a product to sell. In an upcoming article, I’ll discuss finding such a mentor.
For more information on this important step in securing your future, I have recorded a video And A separate podcast.
In the next installment of this series, I’ll show you how to spend even more in retirement without running out of money – provided you’ve saved just more than the minimum to cover your needs.
Richard Buck contributed to this article,
Paul Merriman and Richard Buck are the authors of “We’re talking millions! 12 Simple Ways to Supercharge Your Rretirement. get your free copwhy