No, your children didn’t pay me to write this. I don’t know if they even deserve an inheritance.
But bear with me while I tell you why you want to give them money.
When planning (and managing) your retirement savings, arguably your number one goal should be to avoid running out of money.
From time to time I hear people say they want to “die broke”. I understand what it means: they want to use up their wealth while they are alive. But planning is a bad thing.
Since you don’t know how long your life will be, you have to assume that you will go on living. And that means you need to keep money in your portfolio for income and growth.
Financial planners of all types typically recommend annual withdrawals of 3% to 5% of the value of your portfolio. If you can meet your needs at 3%, there is very little risk of running out of money.
If you take out 5% every year, you will likely be fine for a while. You will surely have more to live with. However, this level of withdrawal is less likely to be sustainable over a long retirement period.
For many years I have published and updated a number of fact-based tables showing hypothetical results from year to year (from 1970 onwards) from different portfolios and withdrawal rates.
If you click on this link You can find some of these tables. For this discussion I am only referring to the first four of them, Tables 10-13.
First, scroll down to Table 12 to quickly see how these work.
The table has 10 columns, each listing the portfolio values from year to year for a given percentage combination of bond funds and the S&P 500 index
SPX, + 1.09%.
In this table, we assume that you withdrew $ 50,000 (5% of your portfolio) in 1970 and then adjusted that amount each year to keep your spending ability with real inflation.
At a glance you can see that the portfolio values at the end of the year in every column have disappeared from the end of the 1990s.
Granted, these portfolios financed many years of retirement. But as the demand for annual withdrawals increased, they just had to give up the ghost at some point.
There are many interesting lessons in this table (and others you can find in this link). But now let’s focus on how much you should take out each year to reduce the risk of running out of money.
Scroll down to Table 13 and you will see the amazing results if the 1970 deducted $ 60,000 (and adjusted for inflation) instead of 5%. This plan has funded 15 years of retirement (plus a few more in some cases). But then it went on my stomach relatively quickly.
Table 11 shows the results of 4% withdrawals. You will immediately see that none of these columns had any problems continuing the payouts through 2020 – a very long retirement.
This is the result you want, and it would indeed leave your children with money. If you scroll down to Table 10, you will find that with 3% withdrawals you would have left extremely generous discounts.
That choice of your annual payout rate should usually depend on how much you need from your portfolio when you retire.
If you can make significant savings and get by on 4% or less, you are likely in very good financial shape. But if you have to start taking out 5% or more, your outlook isn’t all that good. If so, you should consider deferring your retirement if possible and / or finding a way to make extra cash in retirement.
As we’ve seen, the percentage you pull out of your portfolio each year is extremely important. As you can clearly see in Table 12, some columns ran out of money much earlier than others because they had different holdings in equity and pension funds.
For the sake of longevity, portfolios holding 40% to 60% of their assets in stocks seem to be the “sweet spot”.
There are some tricky compromises associated with this issue.
For example, some people are quite risk averse when it comes to holding retired stocks. According to these tables, they could have done well with the 4% withdrawals while capping their stock exposure to 40% or less.
However, the low equity exposure only gave these investors peace of mind, not more money to spend in retirement.
Before I briefly go into the idea of “I want to die broke”, here is my conclusion if you are planning to retire.
Most importantly, start your retirement with as much money as possible. in the This article, I contend that many people could effectively double their retirement income by postponing it by five years.
Second, plan to live a little below your means. No matter how much you take out of your portfolio each year, see if you can meet your needs and still live a good life by spending a little less than you have available. That will put in a bit of cushion for additional expenses to cope with various needs and opportunities that are sure to arise.
Third, if you are unsure about any of this, seek help from a financial advisor who has no products to sell and who is the trustee.
Still want to try and live until you bust (and disinherit the kids in the process)?
in the an article late last yearI discussed a reliable way to do this with a one-time life annuity. An insurance company takes your money (permanently) and in return guarantees you a monthly income for as long as you live.
You cannot outlive your money with this arrangement. However, this is a permanent choice. So only do this when you are sure you understand what you are doing.
An interesting “hybrid” approach is to buy a pension that meets your basic needs when you have enough savings and spend the rest as you see fit.
Even then, I think your best bet is probably having some money left over to leave it to the kids.
This discussion is based on many tables that have helped thousands of investors over the years figure out what to save, how to optimize their investment risk, and how to schedule withdrawals.
For more information on these tables, see my podcast via fixed distributions. And at the beginning of next month, I’ll be writing about how you can safely get more out of your retirement portfolio.
Richard Buck contributed to this article.
Paul Merriman and Richard Buck are the authors of We’re talking about millions! 12 easy ways to improve your retirement.