Safe investment withdrawals for retirees
Joel Dresang: Art, you’re an investment advisor, but a lot of your time is spent actually talking with people about spending, why is that so important?
Art Rothschild: Joel, what we do is help our clients achieve their long-term financial goals and objectives. It’s a lot of counseling. It’s a lot of coaching. I think the single most important thing we do really is help our clients realize what their money is for. They’ve worked their entire lives to build up a nest egg that’ll hopefully sustain them in retirement, and there’s nothing more important than talking to them about how much they can spend.
Joel: How do you figure out how much they can spend?
Art: We’re convinced that if someone takes 4% per year out, they’re going to be able to spend that for the rest of their lives and not have to worry about any depletion of their principal. And furthermore, we think they’ll get a hedge against inflation.
Joel: So tell me the numbers behind that 4%.
Art: Our recommendation today for a well-balanced portfolio is to have about 60% in stocks, and 40% in bonds. We know that over long periods of time, stocks should do what we’re expecting them to do, about 8% per year. We expect bonds going forward to do about 3% per year. Add those together, you’ve got 6%. That gives us a healthy cushion to provide for inflation and still provide a distribution of 4%.
Joel: So there’s about 2% inflation, and 4% that you could withdraw.
Art: That’s correct, and in addition to that, they’d have Social Security, pensions or any other ongoing sources of incomes to supplement that.
Joel: So that’s 4% a year. You recalculate that probably annually, I guess. And I take it that’s just a guideline.
Art: Everyone’s situation is different, everyone’s circumstances are different, so the 4% is just our safest number that we can possibly give you.
Some clients don’t even need to spend that. I have successful clients who are very comfortable spending 1.5%, for example, of their asset base. They just don’t spend a lot of money. That’s how they accumulated what they have in the first place.
Other clients might need more. Some clients have pretty lavish lifestyles. That can be a problem. We’ve done studies that suggest if they don’t, you know, toe the line on that 4%, they’re at risk of losing principal. And so we’re going to coach them and counsel them to spend an appropriate level.
Joel: What about stock market performance? If stocks aren’t doing as well, then would I take less than 4%?
Art: The 4% draw we take from the fixed-income portion of a client’s portfolio. That’s really important. Stocks do go up and down. They are volatile. We never want to have to sell stocks in a down market. So, by deliberately having that 4% draw come from the safe part of a client’s portfolio, that fixed-income portion, then we’re pretty well assured that that portfolio’s going to last for years.
Joel: So you’re buying time to let the stock portion grow again.
Joel: So, Art, within the realm of investing, it’s important to spend, especially in retirement.
Art: Yes. We like to help our clients achieve their long-term goals and objectives. Once they get to retirement, the most important objective is for them to enjoy the fruits of their labor, to be able to spend without having to worry about their money. And we help them not only spend appropriately, but then we help them preserve what they’ve worked so hard to achieve.
Art Rothschild is vice president and investment advisor at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
(initially posted Jan. 14, 2016)