You don't want to run out of money in retirement, so your investment portfolio should be constructed in a way to last your golden years. One of my favorite financial planning authors Dr. Craig L. Israelsen provides evidence that a multi-asset portfolio equally-weighted in large U.S. stock (S&P500), small U.S. stock (Russell2000), foreign stock (EAFE), real estate (NAREIT), commodities (GSCI), U.S. bonds (Barclays Aggregate), and cash (3-month T-bills) outlasts standard portfolios of 60/40 stocks/bonds, 40/60 stocks/bonds, and 100% bonds in a May 2010 article at Financial Planning entitled "Built To Last."
The rule of thumb for retirement nest egg withdrawels is typically 4% annually with an inflation increase per year of about 3% of the withdrawel amount (a COLA). For example, with a $1,000,000 nest egg, the first year amount would be $40k, the second year would be $41.2k, etc... Dr. Israelsen back-tested several 25-year rolling retirement periods using the above portfolios, and although all portfolios survived all periods using a 5% withdrawel rate, only one survived all periods using an 8% withdrawel rate: the robust multi-asset portfolio. Notably the most brutal 25-year periods all started in the early 1970's.
I'd be really interested in knowing how well things would've have fared earlier, since one can argue that historically we've seen the most rapid growth in assets in the last 30 years or so. 30-year rolling retirement periods might be a more accurate norm for retirement now, now that we're all living longer, in which case the 4% annual withdrawel rate is safer for not running out of money.
The rule of thumb for retirement nest egg withdrawels is typically 4% annually with an inflation increase per year of about 3% of the withdrawel amount (a COLA). For example, with a $1,000,000 nest egg, the first year amount would be $40k, the second year would be $41.2k, etc... Dr. Israelsen back-tested several 25-year rolling retirement periods using the above portfolios, and although all portfolios survived all periods using a 5% withdrawel rate, only one survived all periods using an 8% withdrawel rate: the robust multi-asset portfolio. Notably the most brutal 25-year periods all started in the early 1970's.
I'd be really interested in knowing how well things would've have fared earlier, since one can argue that historically we've seen the most rapid growth in assets in the last 30 years or so. 30-year rolling retirement periods might be a more accurate norm for retirement now, now that we're all living longer, in which case the 4% annual withdrawel rate is safer for not running out of money.
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