Skip to main content

Sound Advice: December 21, 2022

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

www.soundasset.com

Any questions?  Please contact me at nrwayne@soundasset.com

Comments

Popular posts from this blog

Sound Advice: January 3, 2025

2025 Market Forecasts: Stupidity Taken To An Extreme   If you know anything about stock market performance, you can only gag at the nonsense “esteemed forecasters” are now putting forth about the prospective path of stocks in the year ahead.   Our cousins in the UK would call this rubbish.   I would not be as kind. Leading the Ship of Fools is the forecast from the Chief Investment Strategist at Oppenheimer who is looking for a year-end 2025 level for the Standard & Poor’s Index of 7,100, a whopping 21% increase from the most recent standing.   Indeed, most of these folks are looking for double-digit gains.   Only two expect stocks to weaken. In the last 30 years, the market has risen by more than 20% only 15 times.   The exceptional span during that time was 1996-1999, which accounted for four of those jumps.   What followed in 2000 through 2002 was the polar opposite: 2000:      -9.1% 2001:     -11.9% ...

Sound Advice: March 10, 2021

The ABCs of Stock Picking After decades of analyzing stocks (and funds) and investing for clients, I'm happy to share in plain English what's involved, what works, and what doesn't.  Keep in mind the reality that successful stock picking is an effort to maintain a good batting average. In baseball, a batting average of .300 or better is considered quite good.  With stock picking, you need to do better than .600, which means you have many more winners than losers. No one gets it right all of the time.  It's not even close.  Wall Street shops all have their recommended lists and the financial media regularly hawk 10 stocks to buy now. Following that road usually is a direct route to disaster.  Don't be tempted. Let's begin with the big picture: The stock market goes up and down over time, but the long-term trend is up.  When there's a rally under way, everyone feels like a genius.  When the market hits an air pocket, though, with few exception...

Sound Advice: June 17, 2020

Rock and a Hard Place Regardless of your age, impressions from childhood linger.  As the first days of summer approach, we all remember the feeling that accompanied the end of a school year.  Yet as much as many of us would like to believe we again have the summertime freedom to do as we wish, the reality is quite the opposite. Although months of confinement and limitations on social interaction have increased our personal discomfort and severely impacted the business community, our current situation is not analogous to the end of any school year.  It’s quite the opposite. There is every reason to continue wearing face masks, social distancing, and avoiding close contact with others.  Nothing suggests that we can modify our behavior significantly or resume patterns of daily living we enjoyed only a few months ago. There are no meaningful advances in medical treatments.  At best, there are attempts to combine different approaches...