Have your retirement cake and eat it, too
I plan retirements almost every day. More importantly, I maintain them every day. There is a difference.
Planning tends to happen at an academic level. We gather data from documents and conversations. We enter it into modeling software. The software tests whether a client’s intentions are sustainable. It flags long-term issues around taxes, health-care costs, and a spouse living longer than the plan assumed. It lets us test better advice. All of that is conceptual, and it matters when people are deciding.
Maintaining a retirement is less conceptual and more real world. Even the best model cannot capture the full mix of human behavior, family dynamics, health changes, and evolving lifestyle intentions, all against the most unruly variable of all: financial markets.
With pensions increasingly rare, most retirements now sit on a foundation of stocks, bonds, and interest rates. Those markets are the canvas. Sometimes they create sustainability problems. A bear market in the first years of retirement, when spending is often high and the portfolio has not had time to compound, can be devastating. Early-retirement portfolios have to be built for that possibility.
Occasionally the markets create the opposite problem. This is one of those times. After several strong years in stock indexes, and with yields on conservative bonds above 5%, many portfolios are larger than anyone planned, and they can throw off more cash flow besides. That changes how people feel, and what they want to spend. It creates a different set of risks.
Here is a little insider shortcut. If someone sits down and asks, “Can I retire?” Before the team builds models and before we design a portfolio, the cocktail-napkin answer is simple. Take investable assets, apply a 4% distribution rate, add an estimate of Social Security, and ask whether the household can live on that sum. The answer depends on their answer.
That 4% rate has been the standard academic starting point for decades. It comes from William Bengen, a grandfather of the planning field, a literal rocket scientist who left aerospace modeling, built a planning firm, and ran thousands of historical spending scenarios across 75 years of stock and bond returns. He concluded that a 4% initial withdrawal, adjusted each year for inflation, would have survived every historical period without the portfolio hitting zero.
Over time the guideline hardened into something that almost sounded like a rule. Bengen himself has said it was never meant to be an edict. It was a discussion point and a flexible guidepost.
The modern question for planners is this: after a long stretch of strong average stock returns, and with government-bond yields above 5%, do we change the advice to match current conditions, or do we stay with the tested canons?
Ever the pragmatist, I try to have my cake and eat it too. A simple hypothetical helps. Imagine a 62-year-old who retired in September 2016 with a $1 million portfolio, 60% in the S&P 500 and 40% in the aggregate bond market, spending at the 4% guideline -- $40,000 a year, then inflation-adjusted. Run the math forward to September 2026 and the portfolio is on the order of $1.8 million.
Does that mean the now-72-year-old should lift the withdrawal from $40,000 to $72,000, or even $90,000 because bonds yield more than 5%?
Inflation has eaten some of the original $40,000. It has not eaten that much, in my experience. And this retiree may still have decades ahead. Sustainability remains the point. I prefer the middle ground.
The increase in capital should be used to make the retirement both better and stronger. Instead of arbitrarily raising the ongoing distribution rate, harvest some of the gain onto other parts of the family’s balance sheet and life. Pay off a mortgage. Replace a car. Take the trip. Resist redesigning the monthly paycheck as if the last decade were a new permanent law of nature. If you use gains to extinguish debt or refresh a vehicle, monthly expenses can actually tighten on the other side.
Cake, and eat it too.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. This material may contain forward looking statements; there are no guarantees that these outcomes will come to pass.
Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com . Securities offered through LPL Financial, member FINRA/SIPC.
