The November 2017 client letter focused on “Safe Withdrawal Rates.” You can see how vital this is because no one wants to outlive their money. We’ll look at whether 3%, 4%, even 6% may be a safe basis for drawing your income. If you spend too much for too long, you’d run out of money before running out of years. On the other hand, taking too little could mean missing out on the life you want to enjoy. (See Customize Your Retirement.) Let’s dive into this discussion now. Then reach me — we can tailor this to your circumstances and life goals.
Safe Withdrawal Rate … for LIFE INCOME
Imagine you’re retiring at 60 with $1 Million invested. Your question soon becomes, “How much can I draw as income and never run out of money?”
It’s easy to calculate this if we could know:
- How long will you live?
- How will inflation affect your future needs?
- What returns will we expect for your investments?
- Are we protecting against risks when markets fall?
- Will children or aging parents suddenly need our help?
- How much will you get from other assets & pensions?
- Have you insured for illness and age-related decline?
- What gifts will you leave for charity and family?
In the 1980s with 10% GICs (guaranteed income certificates) people could get high income with little risk. True, but most people didn’t have so much money saved. Getting 10% on life savings of $100,000 could feel okay but it wouldn’t have remarkably improved one’s standard of living. Today we’re often looking at savings of $500,000 to $2 Million, yet 10-year bonds today pay under 2%.
That’s right – you can see the problem. Getting 2% today on $500,000 it wouldn’t pay any more than the 10% your parents got on $100,000. This has encouraged seniors and baby boomers to invest their money. They can no longer keep it on deposit or “clip coupons” but must truly invest to receive dividends and other income of our Canadian and global economy.
Is 4% the Magic Number?…Is it SAFE?
People have used 4% as a rule-of-thumb. It was generally felt that if you earned 5+% through investing, taking out 4% would still keep your money safe. Problem was, millions of people, entire countries, were hurt by the 2008 financial meltdown. If that was a once-in-200-year disaster it’s behind us for now, yet interest rates are rock-bottom and stock markets can fall 20% to 40% twice every decade. No withdrawal can be safe if you’re suddenly drawing money while markets are in freefall.
Some say drawing 3% is the most they would deem safe. That could suggest living on $2500 a month per million dollars of investment. If that’s a shock, remember GICs pay < 2% and 30-year government bonds are paying under 3%. The greatest risk today could be depending on income from bonds and deposits at those low rates.
Many of our clients are drawing 5% income from pension and other investments. Often they may still find higher values at year-end than when the year began. We’ve been fortunate because of the profound benefits of “life income mandates” to support this higher income. The essence here is that when one piece drops, other areas tend to keep lifting. This stabilizes our plan and helps avoid a disaster. (Also see “income reservoir” as a way of protecting income with less risk.)
Could you Draw 8%
You may be wanting to upsize an early retirement lifestyle, enjoy new travels, spend more on family, even get into your “bucket-list”. We can review how to target a higher income for the first 5, 10, 15 years. I’ve discussed this in “life horizons” because you want to spend more at first, then settle into a quieter lifestyle, which will save money for health and comfort in later years.
Such a lifestyle (and financial planning) may draw 8% income in the first retirement “horizon” – even 15 years if we plan for this. Time passes though and our bodies age: some of our clients have eventually been spending $7,000 to $18,000 (monthly) for physical care and personal comfort. If it’s brief, or you have this insured, your wealth and income can remain safe.
Each household’s situation is unique. That’s why we build your personal plan – and review it often. We have to know your money can support all that you want for your life and loved ones.
What if we Live Longer…OR TOO LONG
Some of us will outlive many friends, even go walking with our great-grandchildren. Life expectancy has increased remarkably. The age-group expanding more quickly today is over-100 … followed by those age 85-99. None of these knew they would beat the average. But the average itself is increasing. In my lifetime, life expectancy has risen about 12 years. Every year we live adds almost another year to our expected lifespan!
That’s why as we prepare or review your financial plan I ask you, “How long do you suppose you’ll live?” You give me a number, whether 75, 85, 90? Inevitably I use a higher number because this will be safer. We know people are living longer. Many of our clients are already older than the lifespan they first suggested. Can I take a speck of credit for this? …we help people build longer lives and safer plans for wealth and loved ones!
Ongoing Discussion – INCOME for LIFE
Few things are more important than protecting your life and enjoyment – now and for all the years ahead. If you earn too little and spend too much, that becomes a disaster. If you earn more than you spend, you’ll leave a nest egg for heirs. Between those two points, where do you stand? … One person could have more years than money; another leaves a fortune when the years are done. WHERE do you see yourself in that kind of picture?
This is always our prime focus and central to our planning. It’s in your certified financial plan, and I welcome you to ponder, question, ask me further, even comment below, and let’s go deeper into this discussion together. I eagerly welcome your feelings and insights on the income you want for Life, and the wealth we’ll protect along the way!
- See more in the “comments” section below, and further insights at “Safe Withdrawal Rates: the New Math.”
Freely share this letter whenever it can help a neighbour or friend, and ease the concerns of someone you know. Introduce us — we love to help.
Yours in Financial Security for LIFE!
Brian Weatherdon, MA, CFP, CLU, CPCA. 905-637-3500
627 Guelph Line, Burlington, Ont. L7R 3M7. 1-877-937-3500
Author: A Lifetime Of Wealth — And How Not To Lose It (2013). Protecting Life, Loved Ones, and Future Dreams (2013). Your Business, Your Retirement: Halton Retirement Study (2015).
** This monthly letter touches on key strategies in Canadian and global investing and financial planning. This letter is not an offer to sell any kind of security, insurance, or program. Historical returns and risk measures are not a valid guide to future performance. Returns are from publicly available sources and research from a variety of firms including but not limited to GLC, RBC, CIBC, Mackenzie, Franklin Templeton. Opinions reflected in this letter belong solely to the author and no other body is responsible for the content expressed here. We value opportunity to consult alongside your legal and accounting firms to advance your financial security and unique goals. We are grateful always to receive your comments and questions.
We realize for sure (though not mentioned above) … Nothing is more important than realizing how every plan is personal; each plan must find its unique design. A 25 year old saving to put it all into buying a house in 5 years, has vastly different needs than their parents at 45 getting a house paid off and some money saved for retirement. Quite different too compared to grandparents at 65 aiming to enjoy a safe and satisfying 20 to 30 years of retirement income. BW
Also a teaser I’ll leave here for now and we’ll see who’s interested. Someone is 75 and planning for twenty years of income to age 95. If their growth averages 5% — and if returns stayed the same which they never actually do – this person could withdraw up to ___% of their savings without running out of money? Bonus: per $100,000 that could safely pay them $____/month? … ((SCROLL TO NEXT COMMENT TO CONFIRM ANSWER.))
If you’ve pondered comment #2, the answer is: the 75-year-old could start withdrawing 8% of savings. In dollar terms, this would be $8024 yearly per $100,000 of savings (or $660 per month). Over time the withdrawal % rises as income continues and is paid out by age 95.