Hitting ‘the number’ in retirement

Your portfolio balance, your budget and your lifespan are all critical inputs into your retirement plan

I’m going to hit the number this year — the one that people often associate with retirement. To be clear, I am not retiring this year, but when retirement is closer than it used to be, there are a few more numbers that command your attention. There’s your portfolio balance: the investments, savings, and IRA/401(k) balances that you’ve been building up all these decades. There’s the amount of money you pull from your portfolio each year for your expenses. And then there’s the number of years you need your money to last.

Number 1 – Your portfolio

While you are working, you contribute to your IRA or 401(k), maybe with a company match; if the markets are flat or up, your balance is increasing as no withdrawals are taking place.

But once you retire, you turn off the spigot of a regular paycheck, and you turn on the spigot to your IRA or 401(k). Now, your account balance will rely even more on the markets, as contributions and company matches have stopped. It will also be drained a little bit each year by your withdrawals. Said another way, that account balance is a moving target.

Number 2 – Your withdrawals

A common guideline is to withdraw 4% to 4.5% of your portfolio balance every year to live on. We’ve had some really strong market returns over the last few years, making it easy to follow the rule. But 2018 so far has been up, down and sideways.

Consider these two scenarios:

  • A $1,000,000 portfolio that gains 6% in a year will total $1,060,000. If you take out 4.5% of your expanded balance, you are withdrawing $47,700, and your portfolio still comes out ahead, at $1,012,300.
  • However, if a $1,000,000 portfolio experiences a 10% selloff in a year, your balance declines to $900,000. Your 4.5% withdrawal comes out to only $40,500, which takes your balance down to $859,500.

Will you have the discipline to stick to a 4.5% withdrawal if it means less money to live on each year?

Number 3 – Your lifetime

How many years will you need your money to last? If you retire at 65, you could need your savings to last 20 or 30 years. Furthermore, do you want to “die broke,” as some people advocate, or do you want to leave something for your heirs?

I’ve written in the past about taking an “endowment fund approach” to your retirement portfolio to boost your odds of not outliving your income and assets.  Endowment funds by definition follow a sustainable, multi-generational approach to investing — using a broad range of equities, fixed income and alternative investments — and have policies that make sure the portfolio rebalances its various asset classes on a regular basis.

To see why this is critical, remember our two scenarios above. Some growth potential is needed in a retirement portfolio to help keep your withdrawals from draining your balance too quickly. But too much risk can result in losses that make it difficult to stick to your withdrawal strategy. Diversification can help provide some growth potential while helping prevent losses in one asset class from dominating the portfolio.

In addition, endowments also are disciplined in what they spend every year, whether markets are up or down.

Talk to your advisor

A very wise man told me that all great investors need to be a little paranoid, to always be looking for potential problems down the road. But being paranoid is not very comforting; a better mindset might be to always expect change in the markets, to develop a plan that may withstand that change, and then be wise enough to stick to that strategy.

Your financial advisor can help you establish a portfolio and spending plan that is designed for your goals.  Keep an eye on those numbers, but don’t forget to enjoy the fruits of your labor as you retire and begin to draw the water from the well.

The below are strategies that can fit into a well-diversified portfolio:

Dividend Sustainability Portfolio

ETF Allocation Portfolio

High Income Allocation Portfolio

Investment Grade Corporate Trust, 5-8 Year

Important information

Blog header image: kan2d/Shutterstock.com

Diversification does not guarantee a profit or eliminate the risk of loss.

Alternative products typically hold more nontraditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

Jack Tierney

Head of UIT Investment Policy and Governance

Invesco Unit Trusts

Mr. Tierney joined Invesco in 2010. Prior to joining the firm, he was the head of product development, management and investment research for Van Kampen Unit Trusts since 2003. During his tenure with Van Kampen, he held positions within Van Kampen Consulting, business development, marketing services, mutual fund product management, and distribution, having started as a wholesaler with Van Kampen Merritt in 1984.

Prior to Van Kampen, Mr. Tierney spent four years with Merrill Lynch in Chicago as a financial advisor. He began his career as a high school business teacher and basketball coach in the Chicago suburbs. Mr. Tierney earned a Bachelor of Science degree in Marketing and a Master of Science degree in Business Education from Northern Illinois University.