Often financial planners will use a fixed period (25-30 years) for determining the length of time that retirement distributions must last. Based on a Journal of Financial Planning reported study by Blanchett in the December 2008 issue, the withdrawal rate and life expectancy have dramatic effects on the amount of money you can take out of your investments during retirement.
All studies are based on 60% stock and 40% fixed income portfolio, so if you plan to have less than 60% of your portfolio in stocks at retirement then these numbers may not be valid.
If you take a 2% withdrawal rate, there is a 0% chance of running out of money from 10-40 years based on historical data (and we have plenty of rolling periods to look at that included the Great Depression and world wars and other difficult periods of history).
A 4% withdrawal rate, succeeded 100% of the time up to only 15 years. 92.5% of the time up to 35 years based on historical data.
But to reduce the probability of failure you could use joint life expectancy rather than a fixed period of time (these studies used age 100 or 35 years from age 65). Using a fixed period "...overstates the probability of the portfolio failing..." during a couple's lifetime (which is actuarily shorter than a fixed period to age 100, for example).
The withdrawal rates increase by 1% to 2% (4% becomes 5-6%) under the assumption that either one or both spouses are still alive before the portfolio runs out of money.
If a planner is paid for assets under management, then it is in "the planner's best interest" to use a longer distribution period but NAPFA planners are fiduciaries and will have "your best interests" in play before their own. A planner that has no assets under management (like myself) can be objective since our fees are fixed.
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.