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: July 16, 2025

Fixed annuities are poor investments Fixed annuities are often criticized as poor investments for several reasons, despite their reputation for providing stable, predictable income.  Here are the key drawbacks and concerns:   High Fees and Commissions Internal Fees:  Fixed annuities can carry a range of fees, including administrative charges, mortality expense risk fees, and rider fees. These can add up to 2%–4% per year, significantly eroding returns over time. Commissions:  Sales agents and financial advisors often receive high commissions for selling annuities—sometimes as much as 5%–8% of the invested amount. This creates a financial incentive for advisers to recommend them, even when they may not be the best fit for the client. Comparison to Other Investments:  Mutual funds and ETFs typically have much lower fees and commissions, making them more cost-effective for long-term growth. Limited Growth a...

Sound Advice: October 8, 2025

How many investors have outperformed the stock market over the last 20 years? Very few investors have outperformed the stock market over the past 20 years.   Data shows that only about 6% to 8% of actively managed equity funds in the U.S. beat the market over this period, with the vast majority—over 90%—underperforming the S&P 500 or equivalent broad indexes. Percentage of Investors Beating the Market Only 8% of equity funds investing in large companies managed to outperform the market over a recent 20-year span. About 94% of all domestic funds underperformed the S&P 1500 Composite Index from 2005-2024. Over shorter timeframes (5-10 years), typically fewer than 15-20% of fund managers beat the S&P 500, and performance persistence is rare. Why It Is Rare The S&P 500’s high returns have proven immensely difficult to beat, especially as indexing has become popular and markets have ...

Sound Advice: January 15, 2025

Why investors shouldn't pay attention to Wall Street forecasts   Investors shouldn't pay attention to Wall Street forecasts for several compelling reasons: Poor accuracy Wall Street forecasts have a terrible track record of accuracy. Studies show that their predictions are often no better than random chance, with accuracy rates as low as 47%   Some prominent analysts even perform worse, with accuracy ratings as low as 35% Consistent overestimation Analysts consistently overestimate earnings growth, predicting 10-12%                 annual growth when the reality is closer to 6%.   This overoptimism can                 lead investors to make overly aggressive bets in the market. Inability to predict unpredictable events The stock market is influenced by numerous unpredictable factors, including geopolitical events, technological changes, and company-specific news.   Anal...