Avoid This Portfolio Withdrawal Mistake Most People Make in Retirement
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- Опубликовано: 8 май 2024
- Today I’m talking about something that challenges the traditional way of thinking about portfolio withdrawals in retirement. If you've been basing your retirement income solely on the 4% Rule or similar strategies, you might be missing out on crucial aspects of your financial plan.
Picture this: you've diligently saved for retirement, and you're ready to start enjoying the fruits of your labor. According to the 4 percent rule, you can withdraw 4% of your portfolio annually and have a high likelihood of that money lasting for at least 30 years.
Here's the catch: real-life spending in retirement rarely follows a linear path. People often have staggered income sources or fluctuating expenses throughout their retirement years, which can significantly impact their withdrawal needs.
If you and your spouse retire at age 65, you may not start collecting Social Security until a few years later. In the meantime, you'll need to rely more heavily on your portfolio to cover expenses. Then, once Social Security kicks in, your withdrawal requirements may decrease. Or perhaps your expenses vary over time.
In this video, we’re looking at the case study of Jeffrey and Cindy. They retire with a $750,000 investment portfolio and have planned expenses for the first ten years, and mortgage payments for the first five years. Their Social Security provides additional income.
Simply applying the 4% Rule without considering their changing expenses suggests they need a larger portfolio to retire comfortably. However, a deeper analysis reveals that their withdrawal needs fluctuate over time. Initially, they require higher withdrawals to cover temporary expenses like travel and mortgage payments. But as these expenses decrease, so does their withdrawal rate.
Instead of blindly adhering to a fixed withdrawal strategy, we need to consider how your spending patterns evolve throughout retirement.
One way to address this is by segmenting your portfolio to cover different phases of retirement. Allocate a portion of your assets to cover higher early expenses, such as travel or paying off debts, while investing the rest for long-term growth to sustain you in later years.
By taking a more nuanced approach to retirement withdrawals, you can better align your financial plan with your actual needs and enjoy a more fulfilling retirement without unnecessary sacrifices or financial worries.
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⏱Timestamps:⏱
0:00 - The problem with the 4% Rule
2:01 - Staggered income and expenses
4:25 - Client case study
7:07 - Withdrawal rate fluctuations
9:28 - Effectively position your portfolio
13:16 - The takeaways
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Great video as always James, thanks! I'd like to see, as a single person, more content geared to us single folks looking to retire in the next 5-7 years!
Same. He has done scenarios for singles before, but it's not often. I suspect he would say the principles are the same.
I was going to say the same...single here also.
Agree!
Absolutely agree - we need information geared to singles - the tax rates and low deduction limits etc are very difficult to manage, when so many expenses are the same for singles and married people. Mortgages, property taxes, insurance, car expenses, helping adult children and grandchildren, the list goes on and on. Even travel expenses, with the exception of paying for one air ticket instead of two.
Same same
Thanks for another great video James! You always explain retirement planning with easy to understand examples.
Thanks for this, although so many of these models assume less expenses as one gets older but doesn’t include more medical expenses as one gets older.
Another good video. I really appreciate the ones with clear examples and the charts to support the discussion.
Fantastic video!! It is precisely this dynamic planning within the context of a dynamic withdrawal strategy that is missing from traditional retirement planning. Well done!👍
Great video James!
Yep, thats how I will spend in my retirement, thank you James!
These case studies are so incredibly helpful! Many examples are married couples - 2 SS, 2 401ks…I would like to see a Single person’s example.
Excellent. Thanks for posting.
I down sized to a cozy smaller home. Thats a huge plus in retirement.
Excellent information and examples. Thank you.
You consistently have the best financial videos on RUclips. Thank you.
Wow, thank you!
Great Video !! I will have a pension, SS at age 65, and a 7 figure 401k. I’m 55 today so hoping to retire at age 58-59.
Thanks for sharing your knowledge. Your videos have helped to adjust my retirement perspective.
Great to hear!
This was interesting, i find your videos useful. However the typical projection of reduced spending in late retirement worries me. I care for my 98 yo mother and have several friends in a similar situation. Elder care is phenomenally expensive, not covered by Medicare and unpredictable. My mother is healthy but still requires full time care. Fortunately she has a pension from my father, Social Security, a teacher's pension and a paid off home. Most in my generation (64yo) will not be so fortunate. I would really be interested in your thoughts about planning for old age care expenses.
Just discovered your channel and love this sensible advice - though it was at first jarring to receive it from someone who looks 18 :)
Really thoughtful and informative video. It seems to me that this strategy intersects with sequence of return risk in at a few points: (1) by having a large chunk of your portfolio in low risk and predictable assets that get spent down, you control for that risk in those years; and (2) the risk of poor early returns is compounded by spending down a large portion of your portfolio in the first (in this example) 5 years of retirement. I know that this can’t all be addressed in a short video, but I would be interested to hear how two couples implementing this same strategy have different (or not so different) later retirements based on the returns on their riskier investments during the 5 year period in which they are spending down the safer ones.
I would happily volunteer to be one of your case studies (representing an outlier situation). Very limited funds in IRA but pension and rental income.
Thanks for this scenario, James. This is very close to my own scenario. NewRetirement tells me I can retire. But the initial withdrawl rate is a bit scary high. But our SS will be fairly high when we are 70 and 65. Our SS will cover all essential expenses in retirement.
I'm also using NewRetirement and my scenario is the same as yours. It's nice to see that having my account drop some during the first few years is ok because when SS kicks in, it starts to go back up.
wishing you well ... if you are using NewRetirement you are obviously a knowledgeable person, please believe in numbers that you know are good ... by having all your future expenses covered by social security it sounds as if you are in great shape ... i hope you have a long, healthy, and happy retirement ...
The GOAT!
Great video, very helpful concepts. One comment: Medical and health expenses will likely become a larger component of expenses as we age. A significant component of expense that should be factored into expense forecasts. But difficult, because who wants to account for increasing infirmity and its related costs?
The best!!
No estimates on long-term care and high medical expenses when people get older.
Thank You
Any client examples to show for those with income from covered calls and/or dividend income?????????
Very informative channel btw......
Thanks! Good stuff!
How about a video for a single guy (never married, no kids) with a pension, 401k, and home?
Just recorded a case study for singles today. That should be released in the next few weeks.
I’m going with take out as much as I need for the month rule
The reality is that investment returns are not linear. I would love to see some illustrations of negative sequence of returns - especially in early years of retirement. A retirement in the decade of 2000-2010 would be a great example. I'm 68 but retired in 1999 and can say that linear models are too simplistic and monte carlo simulations are not typically detailed enough. Your tools would be great in showing a discounted series of cash flows on what people could really expect with a major market correction.
So given the current record high S&P, and the Schiller cap at 34, should we use a lower percentage as a safe withdrawal rate?
It is OK to use the 401k or Ira to reduce RMD 73 years old starting at 67 years old, then let the :social security grow until 70 years old. What do you think, Sir .Thanks 😊
The 4% rule is absurdly conservative. It's great for financial planners because it guarantees a huge pot of money they can charge to manage, and that person will die with a huge pile of money.
It’s a guide and everyone’s situation is different, genius. The government confiscates far more than a good CFP team charges if you don’t plan and execute with knowledge analysis.
We have an inflation indexed pension that covers our annual needs and our withdrawals from our portfolio are just extra. We plan on keeping an aggressive portfolio and will retire at 50. We will do aggressive Roth conversions during down markets, but would like to have consistent annual spending. What would be a good withdrawal rate in up market years that allows us to spend for that year and save some for future down years? Something like 8% annual withdrawal with 1/4 of that put towards building savings back up during an up market and withdrawal 0% in down markets. Is that reasonable?
I still suggest investing in financial assistance or supervision from an expert financial advisor to keep a clean retirement portfolio. An expert handler you can trust to always keep your finances moving forward drastically with every investment.
Nice illustration of a real world scenario - however, would have been more ideal to not change the assumptions half way thru.
It still comes down to investment return and the market…. If market takes off first five years, they are fine…. However, should the market crash in the first five years of retirement, they are not going to be in good shape.
4% WD will leave too much $ at death, underspent during healthy years. What calculator do we use to calculate the expense WD and end it with 20% of Funds at the end of life expectancy?
Could have been Junior Samples, he was a real person.
How about just paying off the house at the time of retirement out of the bonds portion of the portfolio to allow that underfunded first 5 years to move closer to the shortage for years 6 through 10
Is this a case of when a sequence of returns issue could throw a monkey wrench in their plans? Say if the first three years is a nasty bear market with some 30% hits at the start of their retirement? It might require the to quickly adapt their travel plans as that 450K would need some extra time to recover losses.
Good point
What is that tool you are using in these videos? Love that in these educational videos ur including live screens to illustrate each point.
Photoshop
Won’t RMD’s require more than 3% during the later years?
yes he didn't factor in rmd's.
🤘🏻
What about the taxes assuming the withdrawal comes from a pre-tax account.
Yes taxes, their a huge part of planning. This man does have this strategy figured out, but still a tough pill to swallow, spending like that early on is scary with those numbers
Only 10% of Americans have saved a million dollars for retirement so is there any way you could do a video for the 90% other people that don’t have a million dollars saved
What is up with these financial advisors that won't work with you unless you have half a million dollars for them to play with? If I could get there on my own, what do I need them for?
Don't go with an advisor who charges AUM(assets under management). They make more money if you have more assets to invest. If you use a fidicuary, go with a flat fee structure that's not based on a % of investable assets.
Another portfolio withdrawal video that ignores RMDs
If you have half (or more) of your portfolio in a Roth account, RMDs don’t matter much. Roth accounts are exempt from the RMD rule, and exempt from Federal taxes. If you’re delaying taking SS, that’s when you want to do conversions of your IRA to a Roth account, a portion each year to minimize tax impact.
What about a 50 year retirement? What percent withdrawal rate is recommended for that? I conservatively expect to live to be 100. Thoughts anyone?
First, according to Vanguard, the 4% withdrawal rate is more like 3.5% due to the inclusion of 2009 when the S&P dropped 39% in one calendar year. Also, the 4% is indexed to normal inflation which I would say is around 3% annually due to the recent bump up from more Federal spending and tax cuts to high earners. In 24 years, the 4% becomes 8% @3% inflation. So, your answer is INITIAL % rate and your assumed inflation %. But I would say for a 50 year time horizon, you start at 2.5%, assume 3% inflation, and assume you will die between Male average of age 84, and you expected 100. At age 84, and 34 years from age 50, a 3.8% initial withdrawal rate looks good to me, indexed to 3% annual inflation. Another assumption is that your funds portfolio is 50/50. For a 50-year horizon, I would suggest more aggressive, like have 2 years of money market cash (2 x 4%), 2 years of bonds (2 x 4%) and remainder (84%) in indexed funds like a mix of 500 and Health Care. 500 have Apple, Microsoft, Google, etc. and the 500 companies have like 30-40% business outside the US. Healthcare has lower downside than 500, with similar upside, but with more people on government health programs like Medicare and Medicaid, companies can’t gouge as much in the future, for higher profits. No need for other sector funds.
Dude what
If you work to age 70 you only need 30 years to get to 100.
Although i do not expect to have a retirement that will last that long, i have planned for it ... the two components that would allow me to make it through a 50 year retirement are #1 modest expenses and #2 maximizing my Social Security income by delaying when i initially take my benefits (in my case all my required expenses will be covered by SS and a small pension once I begin to take SS). the fact that Social Security has a COLA should allow me to avoid the INFLATION risk that is present in an extended retirement ... BEST OF LUCK TO YOU !!!
OK, I agree with a lot of this, but do NOT agree with your comment about people not retiring early enough. Financial resources, (money), is only one factor in deciding whether you should retire or not. In fact, I would argue, even I gave you 10 million tomorrow, YOU would not retire. You enjoy your work. You like helping people. You are not ready to go sit on a beach.
True, by using sound investing strategies , over decades, I have retired with a portfolio that is large enough, and generates enough, that my withdrawal rate is about 1%. But do I think I worked too long? NO. and likely would have continued to work a few more years, except Covid hit, changing my job and work environment. So, for those in the 50-60 year range, thinking about retirement. Yes you need to do a financial "audit" of your portfolio, and expenses. But you also need to do a "lifestyle: audit too, to see if "retiring" is right for you. .
Agree !! How old were you when you retired? I’m aiming for 58-59
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This is all well and good but our portfolio has gone down over 20% since Trump left office. You cannot count on the portfolio growing every year
Sounds like you need a better financial planner. Stock market is up…
Look at 10 or 20 year averages. Those years were overinflated artificially.