Lincoln Financial Advisors September 2017


Courtesy of Milan J. Torres, CFP ® , CRPC ® Financial Planner

Lincoln Financial Advisors Corp. 18400 Von Karman Avenue, Suite 550 Irvine, CA 92612 949-623-1764


September 2017

THE RULE OF 4 PERCENT What You Need to Know About Divestment


he most basic fact of financial planning is that you need to save for retirement. Everyone knows that you need to combine earning,

saving, and investing to build a nest egg for your life after work. If you turn on the TV, it won’t be long before you see a commercial with balloons or giant dominoes illustrating the impact retirement planning can have on your bank account. While this education is unquestionably beneficial, it overlooks the most strategic piece of the retirement puzzle: withdrawing money once you’re no longer working. Divestment tactics will play a huge role in determining how long your retirement savings last. A study by the Transamerica Center for Retirement Studies (TCRS) found that the greatest fear for retirees is outliving their savings. Given how widespread this concern is, I’m always surprised how little withdrawal education most people receive. I would venture to say it is the number one piece of education I do with most clients. Let’s go through an example to help illustrate the impact of withdrawals on your portfolio’s ability to last in retirement. Assume that you have a $1 million nest egg and that you are going to need $50,000, or 5 percent, to cover your living expenses. If the value of that nest egg is down 10 percent when you need to take your distribution, then you would effectively be down 15 percent. This

is because you are going to have to sell your investments at a 10 percent loss to raise the cash needed to pay your bills. Your $1 million nest egg is now worth $850,000 going into the next year. What are your chances of running out of money if this keeps up? This is where the topic of safe withdrawal rates comes in. Have you ever heard of “The Rule of 4 Percent”? It’s based on numerous studies that have determined what the highest withdrawal rate possible has been, regardless of retiring in a down or up market. It’s a relatively simple rule. It states that you should not withdraw more than 4 percent of your nest egg per year if you want a high probability of not running out of money in retirement. This 4 percent is adjusted for inflation. For example, if inflation was 5 percent for the year, then you would be able to withdraw 4.2 percent in the next year (5 percent higher). More recent studies have argued that 3 percent or even less are the new safe withdrawal rates. Advances in technology

have caused the markets to move at a much faster pace, which means that somebody retiring today has a higher chance of taking a withdrawal in a down market than somebody who retired in 1960. Whether it’s 4 or 3 percent, the concept of safe withdrawal rates can be a scary one for a lot of people. Think about it, a $1 million nest egg translates into only $30,000 to $40,000 a year of income. If you’re approaching retirement, it’s time to develop a prudent, thorough divestment strategy. You’ve worked hard and spent a lot of time building your nest egg. You’ve certainly heard the phrase “Don’t put all of your eggs in one basket,” which actually applies to the investment principle of diversification. When it comes to withdrawing money, though, a more apt saying would be “Don’t use all of your nest egg in one omelette.”

– Milan Torres | 1

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