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: March 16, 2022

Pullback . . . and then what?   The one certainty about the stock market is well illustrated by an account of a 1955 story about J. Pierpont Morgan given by the U.S. Secretary of the Treasury George M. Humphrey. The story is as follows: Somebody said: ‘Mr. Morgan, you are familiar with the stock market.?’ He said: ‘Yes.’ They said: ‘You know quite a lot about it?’   And he said: ‘Yes, I do.’ They said: ‘Do you think you can tell us what the stock market will do?’   He said: ‘Yes, I can.’   They said: ‘That is very interesting.   Will you please do so?’   He said: ‘Yes. It will fluctuate.’ Equally on point is a quotation from Benjamin Graham, widely known as the father of value investing and co-author with David Dodd of the recognized text on Security Analysis: “Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble . . . to give way to hop

Sound Advice: December 29, 2021

“Hope smiles from the threshold of the year to come, whispering, ‘It will be happier.’”                                                         ALFRED LORD TENNYSON           N. Russell Wayne, CFP ®

Sound Advice: August 3, 2022

Are tech stocks worth the additional risk?   Companies whose focus is technology have been accounting for an increasing proportion of the total value of the Standard & Poor’s 500 Index over the latest 10 years.   Since the giant tech companies have grown more rapidly and now represent 28% of the total, the S&P Index has become more volatile. The S&P has been largely propelled by a group that had been known as the FAANGs: Facebook, Amazon Apple, Netflix, and Google.   The propulsion goes both ways.   This year, the combination of a lingering pandemic, hyperinflation, and conflict in Ukraine has sent the investment markets tumbling, with this group leading the way down. For this reason, it seems worthwhile to think about investing in the broad market in slightly different ways.   Since the S&P Index is biased toward the largest companies, it would be interesting to consider the results if all stocks in the index were equally weighted.   That would be an exchange-tra