About 15 years ago, both Ross and Bobby retired. Bobby had about twice as much money in his retirement plan; neither had a monthly pension, except for Social Security. They lived in the same neighborhood and had comparable incomes.
We calculated the maximum withdrawal that Bobby should take from his $900,000 retirement account. He decided to take more than our recommended monthly rate. Ross took only as much as he and Rachel needed to maintain their lifestyles.
Within a few months, Bobby and Pam refinanced their house, using $125,000 of the equity to build an addition and add a swimming pool. Unplanned additional retirement plan withdrawals totaled another $175,000. Within five years their nest egg was halved. Because of the increased debts, Bobby continued taking larger monthly distributions than we recommended.
Bobby spent his money during his “go-go” retirement years, and it worked out for him. He never experienced the “slow-go” or “no-go” years, succumbing to a massive heart attack in the swimming pool within five years of retirement.
Unfortunately, he left Pam a widow with a big house and an undersized IRA. She continued spending until forced to downsize, selling the family home to create financial liquidity.
Ross and Rachel kept themselves in excellent fiscal health. They’ve enjoyed many go-go years without lavish spending, traveling the country visiting family and friends, and using a remote mountain cabin for family retreats. They never took more than a few percent per year from their retirement plans.
Looking at their two charts is almost a tale of opposite experiences. Bobby started with $900k and ended with $500k. Ross and Rachel began nine months later with $550k and had $870k by the time Bobby died.
In all fairness, both of them retired during the recession of 2000 – 2002. Both experienced declines at the beginning of their investment programs. And Bobby’s earlier start exposed his investments to more of the downside. But the extra $175,000 that Bobby withdrew during the recession, on top of an excessive monthly withdrawal rate of over 11%, doomed his portfolio.
It isn’t our job to judge how our clients choose to spend their money. It is our job to help them accomplish their goals. Bobby made it clear that he intended to enjoy his remaining years with the house and woman of his dreams. It wasn’t so good for Pam, but again, each couple makes and lives with their own choices.
Because of this case and others like it, we developed a “Distribution Analysis Report”. It clearly illustrates how many years before all the money is spent (or runs out) at various fixed rates of return and suggests a reasonable withdrawal amount for the next year. Since we prepare it for every one of our retired clients’ annual review meeting, if there is a problem we can discuss the possible strategy changes before it is too late.
If you are not sure if you are taking too much, or want to know if you could afford to take more from your investment portfolios, please contact us immediately.
This material is hypothetical in nature and not intended for use as investment advice. It does not guarantee the attainment of your retirement goals. Individual results will vary.
There is no assurance that any investment strategy will be successful. Investing involves risk and investors may incur a profit or a loss. Past performance is not indicative of future results.
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