No, your kids didn’t pay me to write this. Damn, I don’t know if they deserve an inheritance or not.
But bear with me while I tell you why you should want to be able to leave money for them.
When you plan (and manage) your retirement finances, arguably your most important goal is to avoid running out of money.
Occasionally, I hear people say they want to “live over and over.” I understand what that means: They want to use up their assets while they are alive. But that’s a bad thing to plan.
Because you don’t know how long your life will last, you have to assume that you will continue living. And that means you need to keep money in your portfolio to generate income and grow.
Financial planners tend to recommend an annual withdrawal of between 3% and 5% of the value of your portfolio. If you can meet your needs, taking only 3%, you run out of money.
If you spend 5% a year, you’ll probably be fine for a while. Surely you will have more to live with. But this withdrawal rate is less likely to be sustainable during a long retirement.
Over the years, I have published and updated a set of fact-based tables that show hypothetical results from year to year (starting in 1970) from different portfolios and withdrawal rates.
If you click this link you will find some boards there. For this discussion I will cover only the top four, Tables 10-13 ..
To quickly see how these work in action, start by scrolling down to Table 12.
The table has 10 columns, each showing the portfolio value from year to year for the specific percentage combination of the bond fund and the S&P 500 index.
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 your spending on inflation. actual play.
At a glance, you can see that year-end portfolio values have disappeared in each column, starting in the late 1990s.
Yes, these portfolios have heavily funded the retirement years. But with a growing need for annual withdrawals, they simply had to give up the ghost at some point.
This board (and others you’ll find in that link) has many interesting lessons to teach. But now let’s focus on how much money you should plan to spend each year to reduce the risk of running out of money.
Scroll down to Table 13, and you’ll see staggering results taking $ 60,000 in 1970 (and adjusted for inflation) instead of 5%. This plan can fund 15 years of retirement (plus a few more years in some cases). But after that, it increased relatively quickly.
Table 11 shows the result of the 4% withdrawal. You will see immediately that none of those columns have had any trouble continuing payments until 2020 – a very long retirement period.
This is the result you want, and it will really allow you to leave money behind for your kids. If you roll up to Table 10, you will find that a 3% withdrawal will allow you to leave extremely generous rewards.
This choice of your annual withdrawal rate should usually be determined by how much money you’ll need from your portfolio in retirement.
If you have a substantial amount of savings and can earn 4% or less, you are likely in a very good financial position. But if you need to start by pulling 5% or more out, your prospect is not. In this case, you might consider postponing your retirement if possible and / or looking to make more money in retirement.
As we have seen, the rate at which you withdraw from your portfolio each year is extremely important. But as you can clearly see in Table 12, some columns run out of money much earlier than others because they have different proportions of equity and bond funds.
For long-term survival, the “sweet spot” appears to be portfolios holding 40% to 60% of their assets per share.
There are a number of complex trade-offs associated with this topic.
For example, some people are rather risk averse when it comes to holding stocks in retirement. According to these tables, they may have done well with a 4% withdrawal while capping their equity rate to 40% or less.
However, the low equity ratio makes investors only feel secure, not more money to spend in retirement.
Before I briefly discuss the “I want to die broken” idea, here is my last piece of advice when you’re planning a retirement withdrawal.
Most importantly, start retiring with as much money as possible. In this paragraph, I argue that many people can effectively double their retirement income by delaying 5 years.
Second, plan to live a little lower than you can afford. No matter how much you pull out of your portfolio each year, see if you can meet your needs and still live well by spending a little less than you can afford. That would provide some cushioning for the extra costs of addressing the various needs and opportunities that will inevitably arise.
Third, if you are unsure about all of this, enlist the help of a financial advisor, who has no product to sell, and a trustee.
Do you still want to try to live until the breakup (and in the process, the kids will be inherited)?
In an article late last yearI have discussed a reliable way to do that using single premium annuity. The insurance company will take your money (permanently) and in return will secure a monthly income for the life of you.
With this arrangement, you cannot live longer than your money. However, this is a permanent decision, so don’t do it unless you’re sure you understand what you’re doing.
An interesting “mix” approach, if your savings are abundant, call for an annuity that meets your basic needs and then spend the rest as you like.
Even then, I think your best bet might be planning to leave some of the money left over to the kids.
This discussion is based on a variety of tables that over the years have helped thousands of investors figure out what they need to save, how to fine-tune their investment risks, and how to plan their withdrawal.
To learn how to get more out of these tables, see my podcast about the permanent distributions. And early next month, I’ll be writing about how to safely take more money from your retirement portfolio.
Richard Buck contributed to this article.
Paul Merriman and Richard Buck are the authors We’re talking millions of people! 12 simple ways to earn more for your retirement.