PTBOCanada Featured Post: 'Do I Need $1 Million To Retire? Part 2' Matthews + Associates

Matthews + Associates helps their clients to set clear goals for their retirement, then works with them to achieve those goals for a stress-free retirement.

Building on their earlier blog and podcast: Do I Need $1 Million to Retire? Matthews + Associates think it’s worthwhile to take a closer look at new research published by Morningstar, which indicates a 3.8 per cent safe withdrawal rate for retirement. In other words, a $1 million portfolio could generate only $38,000 of income in retirement. Is this all my $1 million dollar portfolio will sustain?

If you want predictable income increasing with inflation throughout retirement, then this is applicable to you.

Sequence of Returns

The sequence of returns risk is the order in which your investment returns happen. The sequence of returns risk means if the market declines at the beginning of your retirement, it may significantly reduce the longevity of your portfolio. Due to this, we need to figure out what the safe withdrawal rate is. In the financial planning industry, the safe withdrawal rule of thumb is 4 per cent.

You can find out more about the “Top 5 Retirement Risks” here.

Does the Safe Withdrawal Rate Change?

If you’re retiring this year, why can you take 3.8 per cent whereas someone retiring last year could only take 3.3 per cent according to Morningstar research?

The portfolio of the person retiring this year has probably taken a hit. They’re probably starting with less than they would have if they retired a year earlier. We also know inflation has been the highest we’ve seen in 40 years. Not only has their portfolio probably taken a hit, but the cost of everything is higher as well.

The person retiring with a 3.8 per cent safe withdrawal rate might have higher expected returns than someone who retired last year at the 3.3 per cent safe withdrawal rate. The person with the 3.3 per cent safe withdrawal rate faced lower interest rates and higher stock/company valuations at the time they retired, which generally means lower expected returns.

Alternatives

The good news is that there are other retirement withdrawal strategies that allow more spending earlier on in retirement. One category within the Dynamic Withdrawal Strategies includes our favourite strategy: Retirement Guardrails.

The Guardrails

If your goal is to spend the most money possible, the guardrails are a perfect strategy. Firstly, they allow you to live life to the fullest. If the portfolio’s doing well, you have a plan for when you can spend more money. Secondly, you won’t run out of money because there is a lower guardrail that tells us when we need to “tighten our belt” and reduce spending.

Real-World Case Study

We want to look at our own case study based on real-world experience.

Bob and Sue came into a lump sum of money for retirement through the liquidation of their business. They are now trying to figure out their retirement plan. They want to live out all their goals and dreams but not run out of money. They are talking to a couple of financial planners, including one of the big banks.

Different Takes

In comparing different retirement proposals, an issue that comes up repeatedly is that they do not consider the sequence of returns risk. We already know what the safe withdrawal rate is. We just want to make sure we don’t run out of money. If we’re not going to plan to make any adjustments along the way, then we should be looking closely at the sequence of returns risk and consider using the safe withdrawal rate.

In this case, one plan suggested that Bob and Sue could take out between 6 and 7 per cent of the portfolio and increase it with inflation and not run out of money until age 90. If everything works out exactly as the data was entered, and the flat rate of return of 5 per cent doesn’t change, they’ll get the projected income every year until they pass away at the age of 90.

The Realties

However, the issue is there’s a reason for a safe withdrawal number. If they want to make sure they don’t run out of money in the next 30 years, then they shouldn’t be taking 6 to 7 per cent of the portfolio. This is where the dynamic strategies enter the picture. If they want to maximize spending, then there should be a plan for decreasing withdrawals in tough times and increasing them when times are good.

The Safe Withdrawal Rate

How will Bob and Sue know there’s enough that they can spend more money? The safe withdrawal rate is a good starting point, not necessarily relevant for most people once into the planning process, but a good place to start. From there using the dynamic withdrawal strategies can make sense if you want to live your retirement to the fullest. Make sure to have a strong plan to avoid running out of money.

Building to retirement is a project; and like any great project, it begins with a good plan. In our podcast “Do I Need $1 Million to Retire? Part 2”, available on Apple Podcasts, Spotify, Stitcher, Google Podcasts, or by RSS, we answer those burning questions about retirement. We help you learn how to optimize your investments, reduce your retirement risks, lower taxes and build true wealth, in an easy and accessible way.

Matthews + Associates explore the topic in greater depth on our podcast “Your Retirement Planning Simplified” and in our blog article “Do I Need $1 Million Dollars to Retire?’

To learn more about Matthews + Associates, find them online:

Matthews + Associates
Website: https://matthewsandassociates.ca/

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