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My wife and I are both 56. We have around $1.2 million saved – approximately $450,000 in company 401(k)s, $650,000 in a managed account, and approximately $70,000 in personal stocks. We also have approximately $22,000 in savings. Our home is worth $700,000 or more and we owe $197,000 with a 3.875% interest rate. Our advisor says we will be in good shape by 60. We will withdraw 5-8% from our investments and then take Social Security at 62. Do you think will we be able to withdraw between $60,000 and 80,000 annually and still be OK as long as our advisor makes us at least 5% to 8% per year?
– Jim
While it appears that you and your wife have done a good job of saving over the years, the strategy your advisor is proposing sounds risky to me. It certainly could work out for you, but there are two main reasons why I would consider a more conservative approach, which I’ll get into below. (And if you need additional help planning for retirement, consider speaking with a financial advisor today.)
While 5% to 8% is a reasonable expectation for the average long-term return of a low-cost, diversified investment portfolio, you cannot expect your advisor to produce those returns every year. Market returns can fluctuate widely from year to year. For example, the S&P 500 produced a positive return of 28.47% in 2021, only to lose 18.01% in 2022.
No matter how good your financial advisor is, your portfolio is going to be subject to these kinds of ups and downs. You can of course manage that risk through your asset allocation, but you will still have good years and bad years.
If your financial advisor is telling you that he or she can consistently produce returns between 5% and 8% or better, you need to be incredibly wary. Research shows that even professionals struggle to beat the market consistently, so the best you can hope for might be a portfolio that tracks market returns, in accordance with your asset allocation, with as little cost as possible.
The bottom line is that you cannot count on consistent 5% to 8% returns. Your withdrawal strategy needs to account for the fact that your returns will vary, as well as the possibility that the market will suffer a downturn in the early years of your retirement. The latter is known as sequence of returns risk and it can severely impact the long-term viability of your savings. (Talk to a financial advisor to build a retirement plan suitable for your circumstances.)
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