It seems I am hearing more and more often the question, “How much can I take out of my retirement account(s) and assets without running out of money?”
Fortunately, we have a book coming out in the next few months that addresses that and a whole bunch more! It’s called, Creating Your Ideal Retirement – Starting Today! Overcoming the Biggest Planning “Frictions” That Will Keep You From Retiring Well.
To answer the question, here’s an excerpt from the upcoming book….
We have a new client that we’ll call Tom. He came to us frustrated by the low returns he has received over the last 20 years working with a certain advisory group. Quite literally, his annualized return after all those years was just over a quarter of 1% per year. Ouch!
He wanted to know, could we do better for him?
I said …
“Tom, it sure wouldn’t take much to do better than what’s happened here.” So, I showed him using back-tested returns, and actual historical data, how his assets would have grown had he been working with us over that same 20 years. Net of all fees, including mine, it would have been over 9.5% per year.
Are you like Tom? Have your returns been disappointing over the years? Even if your returns have been favorable, are you concerned that you may run out of money down the road? Do you have the research data to back up what percentage withdrawal is “safe” over time? How about what percent can you increase your annual withdrawal without negatively affecting the safety of your principal?
By utilizing a platform (like the one we use here at Wealth Legacy Group®, Inc.,) we can actually increase your withdrawals by as much as 50% more than “conventional wisdom” – while still having a “confidence factor” (the confidence of not running out of money!) of over 90%.
As an illustration, the chart below compares the historical returns of three different allocations from our preferred investment platform – Vantage Conservative – Vantage Balanced – Vantage Aggressive. Next, we compare that to the vaunted Vanguard S&P 500 Index fund and the traditional 60/40 mix of stocks/equities versus bonds/fixed income. We then “stress test” each of the portfolios over a 30-year period and include a 3% annual Cost-of-Living-Adjustment (COLA.) After all that, we determine the statistical probability that there is still money left in our investment portfolio after 30 years.
Why? Because running out of money is NOT an “ideal retirement!”
The statistical analysis below has a fancy name. It is called a “Monte Carlo simulation,” and with the aid of lightning-fast computers, runs thousands upon thousands of iterations to determine the likelihood of certain financial outcomes.
As an example, a 4% withdrawal factor has been considered a “safe” withdrawal rate for decades. That is, historically speaking, someone could withdraw 4% of their portfolio every year with a high probability (confidence factor) of not running out of money.
Given the immense volatility in investment markets we’ve experienced over these last two decades, many wonder if the safe withdrawal rate should actually be 3% or 3.5% instead.
3% – 3.5%? That’s discouraging!
Never fear … there is good news! Using an approach such as we considered above and looking back over the last 30 years, we can easily make the case for taking a 4% withdrawal and also include a 3% annual COLA … and likely never run out of money!
In fact, using the Vantage Aggressive 2.0 portfolio, the back-tested model has a 91% probability of still having money left in the account after 30 years, even at a 6% withdrawal rate and 3% annual cost-of-living adjustment!
So, how did the S&P 500 Index fare over the same period of time?
Using the Vanguard S&P 500 Index as an example, there’s a 94% success rate that your money will last 30 years if you withdraw just 3% with a 3% annual cost-of-living adjustment. That means there’s only a 6% probability that you’ll run out of money.
But what happens with a higher percentage withdrawal – say 4% with a 3% COLA? The Vanguard S&P 500 Index drops to only an 82% success rate.
At a 5% withdrawal factor (and 3% COLA), the success rate drops to only 64% – and only a 43% success rate if we assume a 6% withdrawal and 3% COLA.
Contrast those success rates against the classic 60/40 stocks/bonds allocation and the three Vantage portfolios. How do they measure up?
You can look for yourself, but the 60%/40% traditional allocation does better than the S&P 500 Index if the withdrawal rate is lower. It performs less favorably, however, as withdrawal rates increase.
All three of the Vantage portfolio allocations, on the other hand, do quite well all the way up to a 4% withdrawal rate. What is interesting, however, is how well the Balanced and Aggressive portfolios do as we increase the rate of withdrawal to 5% and even 6%!
This should be very encouraging news to anyone like our friend Tom … that even though your asset growth has been less than you hoped, you can take out a higher percentage than normally prescribed without unduly risking the longevity of your assets.
Now, you’re probably wondering why anyone would choose the Vantage Conservative 2.0 when the Aggressive 2.0 has a higher probability of your money lasting longer at higher withdrawal rates.
For some folks, the market volatility becomes so paralyzing that they just don’t want to put themselves in that position…worrying all night about every blip in the economy.
Now in true reality, very seldom do people go into the Conservative allocation. It’s either they go into the Balanced allocation like my dear wife, or they start in Balanced allocation and switch over to Aggressive. I’ve seen that happen frequently.
Then there are people like me that start out in the Aggressive growth portfolio from the get-go. Yes, there will be more wiggle up and down, but over 30 years, you get a higher return.
The probability of success in the Balanced portfolio over 30 years is surprisingly high – 94% – at even a 5% withdrawal rate. Even a 6% withdrawal rate has a 72% chance of lasting three decades!
But the Aggressive gets even better. A 5% withdrawal using the above back-tested data shows a 98% success rate. Even if you bump it up to 6% withdrawal, your odds of success are still at 91%. That’s a 50% increase over the commonly quoted 4% withdrawal rate!
Let me repeat that.
There’s a 98% probability that your Vantage 2.0 Aggressive portfolio will last over 30 years with a 3% COLA – compared to 64% with the S&P Index and 67% with the 60/40 portfolio!
It also gives you options. If somebody is older or in poor health, they could take a 6% and possibly a 7% withdrawal with a 3% COLA – which is almost unheard of! And they’ll have a 91% probability that they will never run out of money at 6% and even a 74% success rate at 7% + 3% COLA!
For the skeptic reading this, understand this approach works better than anything I have ever seen. That’s in large part because the approach’s unemotional methodology derived from intense analysis of data since 1945 and the 13 recessions over that period of time.
And Tom, who was worried that he couldn’t retire because of the underperformance of his investments, is now gaining confidence that he can, in fact, create his ideal retirement. Because of his smart course correction – continuing his disciplined contributions into the low-cost Vantage portfolio of his choice – and understanding that his safe withdrawal amounts can be much higher than he’d been told – Tom is on the road to achieving his financial and retirement goals.
(My compliance attorney wants me to inform you that past performance may not be indicative of future results. Securities investing involves risk, including the potential loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will recover or react as they have in the past.)
Imagine That™! is a complimentary monthly newsletter provided by Wealth Legacy Group®, Inc. that addresses various topics of interest for high-net-worth and high-income business owners, professionals, executives and their families. Sign up to receive our monthly newsletter here.
R. J. Kelly, Wealth Legacy Group®, Inc. – February 2023
Header image on Canva, one design use license
Monte Carlo Simulation image courtesy of Beacon Capital Management