My wife and I are both 56. We have about $1.2 million saved – About $450,000 in company 401(k)s, $650,000 in a managed account, and about $70,000 in personal stocks. We also have about $22,000 in savings. Our house is worth $700,000 or more and we have $197,000 in debt with an interest rate of 3.875%. Our advisor says we will be in good shape at age 60. We will withdraw 5-8% of our investments and then take Social Security at 62. Do you think we could withdraw between $60,000 and $80,000 a year and still be fine as long as our advisor gives us at least 5% to 8% a year?
–Jim
While it sounds like you and your wife have been saving well over the past few years, the strategy your advisor is proposing sounds risky to me. It could certainly work for you, but there are two big reasons I would consider a more conservative approach, which I’ll discuss below. (And if you need additional help planning for retirement, consider speaking with a financial advisor today.)
Reason #1: Annual returns will vary
While 5% to 8% is a reasonable expectation for the average long-term return of a low-cost, diversified investment portfolio, you can’t expect your advisor to generate such returns every year. Market returns can fluctuate significantly from year to year. For example, the S&P 500 produced a positive return of 28.47% in 2021, only to lose 18.01% in 2022.
No matter how good your financial advisor is, your portfolio is going to be subject to these kinds of ups and downs. You can manage that risk through your asset allocation, of course, but you’re still going to have good years and bad years.
If your financial advisor tells you that he or she can consistently produce returns of 5% to 8% or better, you should be incredibly cautious. Research shows that even professionals struggle to consistently beat the market, so the best you can hope for may be a portfolio that tracks market returns, consistent with your asset allocation, with as little cost as possible.
The bottom line is that you can’t count on consistent returns of 5% to 8%. Your withdrawal strategy needs to account for the fact that your returns will vary, as well as the possibility that the market will take a downturn in the early years of your retirement. This latter point is known as series-of-return risk, and it can seriously affect the long-term viability of your savings. (Talk to a financial advisor to help you design a retirement plan that’s right for your circumstances.)
Reason #2: You suggested an aggressive recording speed
You may have heard of the 4% rule, which states that you can safely withdraw 4% of a balanced portfolio each year, adjusting upward for inflation, with little risk of running out of money over a 30-year period. A recent study from Morningstar does a nice job of diving a little deeper, testing safe withdrawal rates as high as 10% for a variety of asset allocations and time frames.
Your total investment portfolio balance is $1.17 million. If you apply the 4% withdrawal rule to that balance, you can safely withdraw about $46,800 per year.
However, your plan is to withdraw between $60,000 and $80,000 per year, which equates to a withdrawal rate of 5.1% to 6.8%. According to the Morningstar study, those withdrawal rates would give you a 90% chance of lasting 15 to 20 years, assuming only 40% of your assets are invested in stocks. However, your success rate will drop as you extend your timeline to 30 or 40 years.
In other words, you might be able to get away with withdrawing that much each year, especially if you’re lucky and the stock market rises in the early years of your retirement. But it’s an aggressive strategy with a lower chance of success than I’d normally recommend. (A financial advisor can help you plan your withdrawals and create a retirement income plan.)
What are your alternatives?
If I were your advisor, I would suggest some alternatives to the plan you have presented.
One option is to reduce your spending so that you can live on smaller withdrawals. If you can get your annual withdrawals closer to that $46,800 amount, you increase the likelihood that your portfolio will outlive you into retirement.
Another option is to work longer. That gives you more time to save, more time to build up Social Security benefits, and fewer years of retirement to support.
You may also want to consider how you’ll claim your Social Security benefits. There are strategies you can use to maximize those benefits, which can reduce the amount you have to withdraw from your investment portfolio. (And if you need help optimizing your financial plan for retirement, consider talking to a financial advisor.)
Conclusion
Your advisor has a much better understanding of your situation than I do, so it’s certainly possible that I’m missing something and that your plan is sound. But based on the information you’ve provided, you may want to proceed with caution. Being too aggressive with withdrawals, especially in the early years of your retirement, could cause problems later.
Tips for retirement planning
-
Your income needs typically decline during retirement, but by how much? T. Rowe Price recommends starting by aiming to replace 75% of your pre-retirement income. You can then adjust that percentage up or down based on your savings rate during your working years and your spending during retirement.
-
A financial advisor can help you save and plan for retirement. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can schedule a free introductory meeting with your advisors to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
-
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid—in an account that isn’t subject to big swings like the stock market. The tradeoff is that the value of liquid assets can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
Photo credits: ©iStock.com/zamrznutitonovi, ©iStock.com/yongyuan
Please note: Matt is not a participant in the SmartAsset AMP platform, nor is he an employee of SmartAsset, and he was compensated for this article. Questions may be edited for clarity or length.
The post Ask an Advisor: We’re 56 with $1.2M in Investments and Savings. Can We Afford to Withdraw $60,000-$80,000 a Year in Retirement? appeared first on SmartReads by SmartAsset.
