First of all you have to know that every investment tool has a designed purpose and often times many investors and financial planners are using tools for things other than their purpose.
For example, let’s say a retiree with 1 million dollars has their money in stocks and they are taking income out of that portfolio each year to support their life style. Here is the problem, they are taking income from a tool designed for long term growth, NOT a tool or plan to provide a current income stream.
With this in mind, many retirees have been taught what is often called the “4% withdrawal rule”. This traditional rule of thumb is often used to determine how much income you may be able to take off of your portfolio per year without ever running out of money.
The way the 4% rule works is that you start by taking 4% out of your portfolio in the first year The next year you take out the same figure you took out the first year plus inflation.
So if you use the same retiree with $1 million, he/she would start by taking $40,000 out and then inflation is 3%, then the second year you take out $40,000 + 3% ($1,200) = $41,200.
Every year after that you adjust the previous year’s withdrawal amount by the inflation rate.
Now let me tell you some news. This rule does not work very well and could easily cause you to run out of money. In other words it’s a bad plan.
The biggest problem with the 4% rule is that one can’t attempt to finance a constant non-volatile spending plan using risky, volatile investments. Maintaining the same withdrawal rate in down markets will cause the retiree to run out of money.
So the questions you have to ask yourself is this… “How stable is your income source and what’s the worst case scenario with your current plan?”
I will like to inform you that there are a few things you can put in place to help you protect your principle as well as your income during retirement. Such approach we often call “Income for Life” income planning or “Buckets of Income Planning” or Time Segmented Model. Whatever, you want to call it, it works the same way.
Basically, this approach to proper income distribution planning revolves around putting together a plan that uses multiple investments, divided into multiple time frames, and some income guarantees. This approach strategically combines shifting risk and investments to achieve Reliability of Income (ROI) and better be able to manage your emotions at retirement.
Although definitely not the only approach to retirement distribution planning, this strategy has proven to allow retirees to maintain their initial principal and weather bad markets even if their initial withdrawal is as high as 5.666% rather than the traditional 4%.
Folks – You only get “one” retirement and you need to get it right. You need to find yourself a financial advisor that can demonstrate expertise in retirement income planning. It may require that you change advisors, just like you would change doctors, if your current physician was not able to treat your condition. There are a multitude of retirement income models to select from, but only a few that will meet your needs and are easy to understand.
Remember , Retirees don’t go to the pharmacy with their financial statements; you go with your check book. Your life savings is at risk. So make sure you have the right plan!
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Wealth and Business Planning Group, LLC (The Financial Quarterback™) is a Registered Investment Advisor in the State of Florida that provides Fee Planning and Asset Management. Depending on your state of residence, Wealth and Business Planning Group, LLC (The Financial Quarterback™) may not be able to immediately provide services. For more information go to www.thefinancialqb.com.