The markets rise and fall. Sometimes the falls are extravagant, harmful affairs that decimate portfolios intended for retirement. Sometimes, and this is been worse, you are in retirement, with 30 percent of your life still to live, and the money starts running out.
How does one prepare for such a situation? We will all be in this place at some point if we should live into retirement, which is the goal. But how do we make it so we run out of breathe before we run out of money?
Here is a trick – no, really a method – to allow lifestyle-sustaining portfolios to last significantly longer. I might add that you have heard it before, but not in this context.
Let us begin with a hypothetical: Suppose it’s 1998 and you have $1 million in assets you want to draw from for the next 25 years for retirement. Over the course of that period the market is positive for 19 of those years.
Typically, one would take a percentage of the portfolio to live on – say 7 percent. But taking in the years directly after the market – and your portfolio – have suffered a downturn will compound the loss. In 2008 the stock market S&P experienced a 33 percent downturn. If you add your 7 percent, it takes your portfolio even longer to recover.
The secret is to have cash or another investment that you can take from just in the years after a negative turn in the market. In the above scenario, if the client had taken from the investments at 7 percent for all 25 years, at the end the remaining balance would be under $200,000. But if the client didn’t live off the portfolio in the years after a market loss, the portfolio at the end of the 25-years would still be more than $1 million.
This is just one way to rise above the ashes of a recession, or worse, and still have assets to spare in the long run.
Jeanne Brutman, LUTCF, CFS, CFBS, CLTC, CLU, is a financial strategist and advocate for individuals and business owners with a focus on lifestyle preservation and legacy transfer for her clients. For more information, see askjeannebrutman.com.