No, your kids did not pay me to write this. Heck, I don’t know if they even deserve to get an inheritance. But bear with me while I tell you why you should want to be able to leave money to them. When planning (and managing) your retirement finances, your most important goal should be to avoid running out of money. Occasionally, I hear people say they want to “die broke.” I understand what it means: They want to use their assets while alive. But it’s a bad thing to plan for. It would help if you assumed you’d keep living because you don’t know how long your life will last. And that means you need to save money in your portfolio, generating income and growth.
Read: Imagining your future self can help you plan for a better retirement. Financial planners of all stripes tend to recommend annual withdrawals of 3% to 5% of your portfolio’s value. If you can meet your needs by taking out 3%, you’re in very little danger of running out of money. You’ll probably be fine if you take out 5% each year. You’ll undoubtedly have more to live on. However, this level of withdrawal is less likely to be sustainable over a long retirement. For many years, I’ve published and updated a set of fact-based tables showing hypothetical year-by-year results (starting in 1970) from various portfolios and rates of withdrawal.
If you click on this link, you will find some of those tables. For this discussion, I’ll refer only to the top four, Tables 10-13. To see how these work quickly, scroll down to Table 12. The table has ten columns, each showing year-by-year portfolio values for a particular percentage combination of bond funds and the S&P 500 index.
SPX, -0.11%. This table assumes you took out $50,000 (5% of your portfolio) in 1970 and adjusted that amount yearly to keep your spending ability up with actual inflation. At a glance, you can see that the end-of-year portfolio values disappeared in each column starting in the late 1990s.
Granted, these portfolios funded a lot of retirement years. But with increasing demands for annual withdrawals, they had to give up the ghost at some point. This table (and others in that link) has many engaging lessons to teach. But for now, let’s focus on how much you should plan to take out each year to reduce your risk of running out of money. Read: Save $1,000 a year, retire with millions. Scroll down to Table 13, and you’ll see the startling results of taking out $60,000 in 1970 (and adjusting for inflation) instead of 5%. This plan could fund 15 years of retirement (plus a few more in some cases). But after that, it went belly-up relatively quickly.
Table 11 shows the results of 4% withdrawals. You’ll see instantly that none of those columns had trouble continuing the payouts through 2020 — a very long retirement. This is your desired result, and it would indeed let you leave money to your kids. If you scroll up to Table 10, you’ll see that 3% withdrawals would have allowed you to leave extremely generous bequests. This choice of your annual withdrawal rate should generally be determined by how much you need from your portfolio when you retire. You will likely be in excellent financial shape if you have substantial savings and can get by with 4% or less. But if you need to start by taking out 5% or more, your prospects aren’t quite that sound. In this case, you may consider postponing your retirement if possible and find a way to earn somra money while you’re retired.
As we have seen, the percentage you withdraw from your portfolio each year is significant. But as you can see plainly in Table 12, some columns ran out of money much sooner than others because they had different equity and bond funds proportions. For longevity, the “sweet spot” seems to be portfolios thaholding% to 60% of theet inequities. There are some tricky trade-offs associated with this topic. For example, some people are pretty risk-averse when holding equities in retirement. According to these tables, they could have done just fine with the 4% withdrawals while limiting their equity exposure to 40% or less. However, the low equity exposure bought those investors only peace of mind, not more money to spend in retirement.
Before I briefly discuss the idea of “I want to die broke,” here’s my bottom-line advice when you’re planning retirement withdrawals. Most importantly, start your retirement with as much money as possible. This article argues that many people could double their retirement income by postponing it to five years. Second, plan to live a bit below your means. No matter how much you take out of your portfolio every year, see if you can meet your needs and still live a good life by spending a bit less than you have available. That will build a bit of cushion for extra expenses to deal with various needs and opportunities that will likely arise.
Third, if you’re unsure about all this, enlist the help of a financial adviser who does not have products to sell and is a fiduciary. Do you still want to try to live until you’re broke (and, in the process, disinherit the kids)? I discussed a reliable way to do that in an article late last year: using a single-premium life annuity. An insurance company will take your money (permanently) and, in return, will guarantee you a monthly income for as long as you live. With this arrangement, you can’t outlive your money. However, this is a permanent decision, so don’t do it unless you are sure you understand what you’re doing.
If your savings are ample, one interesting “hybrid” approach calls for buying an annuity to meet your basic needs and then spending the rest as you like. Even then, I think your best bet is likely to be planning to have some money left over to leave to the kids. This discussion is based on many tables that have helped thousands of investors figure out what they need to save, fine-tune their investment risk, and plan for withdrawals over the years. To learn how to get more from these tables, check out my podcast about fixed distributions. And early next month, I’ll write about safely taking more from your retirement portfolio.
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