At our firm, we start the year by reaching out to clients to review their investment objective and see if any changes are in order.
We find this a useful exercise to make sure clients’ portfolios properly reflect their goals and changing needs.
Your investment objective summarizes your overall portfolio goals (like “growth,” or “growth and income”) and provides a framework for your asset allocation, determining how much of your portfolio will be invested in cash, bonds and other income investments, and how much in stocks and other growth investments.
But as important as asset allocation is, there is something that has an ever bigger impact on our clients and whether or not they will be able to reach their goals – especially in retirement.
It’s their withdrawal rate, or how much of their portfolio they take out and spend each year.
Long-time financial columnist Walter Updegrave, now the editor of RealDealRetirement.com, just wrote an excellent story on the subject (“Why Your Withdrawal Rate Matters More Than Your Asset Allocation In Retirement“).
Here’s what he says. “Achieving the right balance between stocks and bonds is a key concern for retirees wary of exhausting their retirement savings, especially in a rocky market like this one. But if you really want to make sure you don’t outlive your nest egg, you’ll want to focus even more on choosing an appropriate withdrawal rate.”
We absolutely agree.
That’s why the second task we undertake for clients each New Year is a review of their withdrawal rates. Clients usually find the annual feedback helps keep them on track.
(We find it’s much like Goldilocks and the Three Bears. Some withdraw and spend too little, some withdraw too much, and some withdraw just the right amount).
Here’s some key points from Updegrave’s article:
Find the happy medium. Stretching for too much growth, and putting too much in stocks, can be harmful in retirement. Aim for the happy medium. Too little in stocks means you won’t get enough growth to maintain your lifestyle, too much means you might crash and burn. For most people, a reasonable approach is to keep stocks between 40 and 60% in retirement.
Don’t overdo it. If you take out more than the recommended 4% per year, you raise the odds of running out of money. Try to stick to a reasonable initial withdrawal rate of 3 or 4% to make it all work.
Leave a little something behind. Want to leave a legacy for kids or family? Better go for the gusto and amp up the stocks, assuming you can tolerate the market ups-and-downs.
No crystal ball. No one can predict the future, so be willing to make changes based on real-life market returns. “You should stay flexible about adjusting withdrawals up or down throughout retirement based on market conditions and your spending needs,” advises Updegrave.