That amount, combined with her $30,000 Social Security benefit, would provide her an annual income budget of $75,000. Starting with a 4.5 percent drawdown assumption, she would withdraw $45,000 per year, adjusted for inflation. Her story envisions a budgeted, but flexible income that allows her the control to make adjustments as needed.īeth’s one million dollar 401(k) would be invested in a portfolio of assets that contains approximately 60 percent equities and 40 percent fixed investments. Creating a balanced portfolio of equities and fixed investments, this strategy solves for an inflation adjusted income that she can draw down each year which, using historical probabilities, is highly likely to survive Beth. Her story entails an income she can’t outlive, simplicity in financial management, and yet some wiggle room for future changes.īeth’s situation is a candidate for the “systematic withdrawal” retirement income strategy. These invested funds could also represent a future legacy for Abigail’s children when she dies. The remaining $200,000 balance in her qualified plan could be invested in a balanced portfolio that provides a potential inflation hedge. Adding that to her $30,000 Social Security income, she would have an annual income of $82,000 per year – meeting her goal. At age 65, an annuity would generate a lifetime income of approximately $52,000 per year. To simulate that outcome, she could take $800,000 of her 401(k) balance and annuitize it. She would have an income floor she can’t outlive.Ībigail wants to have the guaranteed income her parents enjoyed with their defined benefit plans. The story would focus on her income need and the guaranteed sources of lifetime income used to assure success. Retirement planners would typically recommend a “flooring” strategy for Abigail’s situation. If the narrative fits the personality, the plan has a better chance of succeeding. Reality checks will be needed, and compromises made. If the story fits, the retirement plan has a better chance of blending with that retiree’s style. An approach to drawing down retirement income should be laid out in order to see how true that story feels to the owner. Before addressing the legitimate assumptions tied to retirement planning, the advisor should first help create and tell a story for the retiree to show the bigger picture. What seemed like an informative strategy session became a frustrating slog into financial uncertainty. These women shouldn’t feel like they are being punished for successfully saving wealth. ![]() What happens to Abigail’s income if there is significant inflation?.Are we projecting income before tax or after-tax?.Is 4.5 percent the right amount of systematic withdrawal to take?.Should they come up with a number that reflects what they need to draw down in order to meet their standard of living goals, or is the question really how much they can afford as a drawdown? These women are financially comfortable, but they are not wealthy. This begs the question of how they should look at their prospects for a retirement income. Part of that capital is Social Security, and the other part is a pile of money in a 401(k) account. These three individuals are soon to embark on a perilous journey where their human capital - their jobs - are going away, and they must solely rely on their retirement capital. Should their drawdown strategy target what they need or what they can afford? Markets have been so volatile, especially recently, and she worries she may be too old to take on risk. She shares Beth’s attitude about working with whatever she can afford as income, but she is concerned about the wisdom of having her retirement capital in the stock market. She plans to live within her pre-determined budget, and the kids can have whatever is left after she passes.Īnd then there’s Camila. Beth is concerned about future inflation and wants her income to maintain its buying power. ![]() If someone can help her figure out what she can afford to take per year as income, she’ll live with that number and make it work. ![]() Her story is that she is self-made, disciplined, and comfortable with risk. Beth has a very different attitude towards wealth.
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