Withdrawals in Retirement
After folks save money during working years, the
obvious question that needs answering is whether enough has been put away to
support one’s desired lifestyle in later years.
So if, for example, you have managed to accumulate $1 million, it will
be helpful to estimate your future returns on that total as well as other
income, such as Social Security benefits you will receive. You will also need to estimate your ongoing
expenses.
If you earn 4% on your investments and receive $2,500
a month from Social Security, you will have an available pretax total of
$70,000, which will leave disposable income of $55,000 to $60,000 depending on the
tax bite in the state where you live. If
your expenses are above that level, you’ll have to dip into the investment
principal regularly to fill the gap. That
may be a concern if you hope to leave a substantial legacy for children or
others. In the absence of better returns,
there will be a shortfall without even considering the possibility of substantial
unreimbursed healthcare expenses later on.
With that said, let’s focus on historical returns on
investments and what may lie ahead. For
the equity market, as measured by the Standard & Poor’s 500 Index, the average
of all 10-year rolling returns has been 10.32% through October 31st,
2020. A rolling return covers a 10-year
period such as 1937-1947 or 1969-1979. During
the late 1930s, mid 1970s, and late 2000s, the rolling returns were briefly in
the low negative or positive single digits.
But it should come as no surprise that rolling returns a decade or so
later climbed into double-digit territory.
When Social Security began in 1935, life expectancy at
birth was 61.7 years. These days, life
expectancy is now just short of 80 years, so even with a short span of market weakness,
what follows will probably help take up the slack if earnings on your
investments are an essential part of your income stream.
The bond side of the equation must also be considered
since asset allocation tends to become more risk-averse as time passes. Since 1926, the historical rate of return on
bonds has been between 4% and 6%. Here,
too, the average may obscure the variations of prior years and the latter will
underscore the reality that in the absence of holding high-quality bonds to maturity,
there is, indeed, a significant measure of risk involved. From 1928 to 1979, the year when inflation peaked
and interest rates moved into the mid-teens, annual returns on bonds averaged
3.0%. Then, as rates eased for nearly
four decades through 2008, annual returns on bonds soared to 9.3%.
More recently, inflation is way up again and bond
prices have suffered. Even so, the Fed
has indicated that its program of raising rates may slow over the coming
months. Thereafter, a slowing economy may
prompt a subsequent easing. That would help both the equity and bond markets.
Though studies suggest that a 4% rate of withdrawal
from retirement funds, adjusted for inflation, will usually be successful, it
seems reasonable to suggest that more attention be given to managing expenses
and allocation of investment assets to maintain a comfortable balance going
forward.
N. Russell Wayne, CFPÒ
Any questions? Please contact me at nrwayne@soundasset.com
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