Maximizing Your Wealth

When advising clients on a suitable rate of withdrawal from their portfolios during retirement, we face the challenge of recommending a level of withdrawal that could be less than possible, often less than desired, but within parameters intended to transcend the retirement years. As a general rule, when retiring in your early 60s, a gross portfolio withdrawal rate of 3%-4%, increasing annually by inflation, has been found to be a generally prudent strategy. Although maintaining one's current lifestyle in retirement ranks primary for many retirees, achieving that goal is often challenging, and secondary to outliving your savings. This brings to mind the old adage, it's better to be safe than sorry. However, a recent article by Jonathan Clements in the Wall Street Journal suggested that our "general rule" could be too conservative.

Mr. Clements's described a new study by certified financial planner Jonathan Guyton that suggested retirees may be able to withdraw as much as 5.8% initially from a balanced, diversified portfolio, which included a 10% allocation to cash. Based on historical returns, Mr. Guyton found that retirees could generate 40 years of income while surviving brutal market conditions, such as high inflation and a steep market decline early in retirement, if they follow his three rules.

• If your portfolio loses money during the year, you cannot give yourself a raise the following year, not even to compensate for inflation. Your portfolio's beginning of the year value must be greater than last year's beginning value plus the total of your withdrawals for that year.
• No matter how high inflation gets, your maximum annual increase is 6%.
• You have to avoid selling hard hit stock funds. Instead, each year, start by lightening up on winning investments.

The article does acknowledge the fact that this strategy is based on historical returns and continues to alert readers that "if we get wacky markets, miserably low long-run returns, you may have to withdraw less than Mr. Guyton suggests." He goes on to say that because the first and second rules will occasionally limit spending increases, there's a chance that retirees who use Mr. Guyton's strategy will receive less total income over 40 years than if they had started with a lower initial withdrawal rate but got inflation increases every year.

For us, the study touches on a recurring challenge we face in providing retirement planning counsel. That being, by adhering to a 3%-4% withdrawal rate, is the retiree sacrificing a more enjoyable lifestyle in retirement than is possible? Would a 5.8% rate deplete the portfolio sooner than expected? Although Mr. Guyton's strategy sounds appealing, the risk involved could be considerable since past performance is not indicative of future performance. More importantly, could his strategy be taking too much risk at a time when the possibility or the opportunity to re-enter the work force no longer exists.

This study also relied on "rebalancing" appreciated assets to cash rather than reinvesting in depreciated assets, and being willing to liquidate bonds below their target allocation if equities underperformed for a period of time.

These are the challenges we face with you. Our primary objective is to help you reach your primary objective. This article will provide some interesting discussion for investment reviews with you in the coming months. We look forward to having that conversation.

As always, we will continue to proactively evaluate and assess the value of new developments within our industry whether it be retirement planning, investments, taxes, or estate planning and integrate those concepts that we or your other advisors believe could enhance your situation.