How Much Can I Spend Without Putting My Portfolio at Risk?
As originally published in Worth
Both in and before retirement, it is important to know how much spending is too much without dangerously depleting your portfolio or failing to meet long-term financial goals. Even people with considerable wealth must beware, lest spending get out of control.
But, how can you determine a spending rate that provides a steady income flow without worry that it will go too far? Several guidelines may help you arrive at your most appropriate solution.
Recognize what can and cannot be controlled. Spending is largely within your control. What’s not is the rate at which your money will grow – since growth depends heavily on the ebb and flow of the economy and the stock market. With that in mind, start by identifying your long-term goals and align your spending with them. If your objective is to pass along substantial wealth, you may need to more strictly prioritize your own spending than you would otherwise.
Everyone needs a budget, regardless of net worth. Having a budget helps maintain consistency in spending and keep you on a sustainable long-term financial path. Budget planning also can help you absorb big-ticket items without significantly altering your lifestyle. Identify the likely life events in your near future and prepare for their economic impact: children attending college, weddings, trips, a move into a retirement community, even philanthropic donations. In addition, keep an adequate liquidity reserve to help you weather market volatility and absorb emergency spending.
The 4% rule is a good starting point. The rule of thumb that recommends withdrawing 4 percent of savings in the first year of retirement and adjusting for inflation thereafter is a reasonable starting point, in that it allows you to grow your assets in real terms over time. You can withdraw more if you are not concerned with leaving a sizable estate, or if you are in the midst of a cycle of very strong market returns. However, it is important to remain flexible enough to be able to cut back on spending during market corrections.
You should also regularly review your spending withdrawal rate and adjust it as needed based on changes in personal wealth, time horizon, market conditions and portfolio performance.
Plan on living beyond your life expectancy. Be mindful that there is a 50 percent probability you will live longer than the actuarial tables say is average for your age. Your remaining life expectancy increases as you get older, too. This is why some financial planners now use 95 or even 100 as a base case for life expectancy. If your plan only carries your finances to age 85 or 90, it may be time to get more conservative. The longer you live, too, the greater risk that inflation can undermine your financial goals.
Work with an investment professional. A financial advisor can devise a strategy that takes all these variants into consideration along with your risk tolerance and investment preferences. He or she can help you build and regularly review a well-diversified portfolio, to maximize the probability of achieving your long-term financial goals.
Consider taking a “total return” approach to investing, where you withdraw not only from income generated within a portfolio but also from capital appreciation. This will help you smooth out the economic cycles and give you the psychological boost of selling your best-performing assets while hanging onto to those that are underperforming.
Ultimately, there is no one-size-fits-all withdrawal rate that will ensure the longevity of a portfolio or the ability to meet long-term goals. A wise approach is to work with an investment professional who can help determine the most prudent strategy and keep you on course.
The material shown is for informational purposes only and should not be construed as accounting, legal, or tax advice. Altair Advisers LLC is a registered investment adviser with the Securities and Exchange Commission; registration does not imply a certain level of skill or training. While efforts are made to ensure information contained herein is accurate, Altair Advisers cannot guarantee the accuracy of all such information presented.