The economics of retirement mean that you are moving from relying on your paycheck to relying on your portfolio. How large does your portfolio have to be to feel confident you won’t run out of money?
Many financial planners address this question using the concept of a Sustainable Withdrawal Rate (SWR). The SWR is the rate at which you can withdraw from a retirement portfolio that will allow it to sustain itself, minimizing the possibility it will become exhausted. Endowment funds and foundations use a similar concept to decide how much of their fund they can allocate to ongoing operating expenses. Individuals taking withdrawals from a retirement portfolio have to do the same.
Calculations within the financial planning industry vary, but four percent (4%) is frequently used as a rule of thumb for a Sustainable Withdrawal Rate from a retirement portfolio. That means for every $1,000,000 in a retirement portfolio, a person can take out $40,000 to spend, increase that $40,000 each year to adjust for inflation, and have a pretty good chance of not running out of money, of not exhausting their retirement portfolio. Put another way, if someone wanted $100,000 per year to spend, they would need a retirement portfolio of $2,500,000. (Four percent of $2,500,000 equals $100,000.)
The Other $600,000 in Your Portfolio
Take a look at Social Security in this context. A typical Social Security benefit for most of my clients is more than $2,000 per month. It is not enough to live on, and there is a tendency to belittle it. But $2,000 per month is $24,000 per year. At a four percent SWR, it would require a portfolio of $600,000 to produce $24,000 per year. Every $250 per month change in a Social Security benefit is the equivalent of $75,000 in retirement portfolio value. Suddenly the small numbers take on larger significance. It’s worth your time to pay attention to this benefit, to make sure it is properly worked into your retirement planning, and to be aware of government proposals to alter it. |
