If you’ve made it to retirement, congratulations! You’ve accumulated enough money to create your own portfolio-generated paycheck. Excellent work.
But you can’t take it too easy, because you’ll receive a severe pay cut if you deplete your portfolio too fast. How much can you take out each year and be almost certain that you won’t outlive your savings? Sherry Cooper BMO Chief Investment Officer states in her book, the New Retirement, no more than 5% a year. Other studies says 4%. That’s the withdrawal rate that would have sustained a balanced portfolio over most 30-year historical periods. Sure, if you retire on the eve of the next bull market, you can take out more. However, if you quit working right before the next bear market, then taking out more than 4% or 5% a year could send you starving and back to work in old age.
In my practice, retired clients tend to be very responsible and follow the plan we have worked out for them. But some new clients that come our way show that even millionaires can deplete too fast. A million dollar may seem like a lot of money but by the 5% withdrawal rate measure, it is only about $4000 per month.
When we do cash flow analysis, we go beyond the simple 4 or 5% rule. We actually evaluate your personal tax rate, type of assets your hold and need for more or less cash flow now and later. Our planning is personalize and quite in-depth.
If you think that you can effectively wing it on your own simply because you have a large enough nest egg. Think again. Professional Planning is imperative to stay on track and keep your lifestyle alive as long as you will!