Weekend Reading: What Retirees Get Right About Their Income

This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
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Weekend Reading

We might not truly know what our financial future looks like, but the good news is, retirees are still managing to successfully recognize their income needs, even when it means stretching researched rules. Read the article from Morningstar below.


Looking at the numbers: The author here analyzes a model which focuses on varied income withdrawal outcomes for retirees, based on the following inputs:

📌7 percent annual return

📌8 percent annual standard deviation

📌3 percent annual inflation

📌30-year time horizon

📌Withdrawals automatically adjusted for inflation growth, so they remain constant in real terms

📌90 percent probability of success for the model’s simulations

Testing portfolio performance: Through each analysis, the author notes that if changing a number in any of the variables above doesn’t affect the outcome, that factor isn’t critical. On the other hand, if the outcome drastically increases or decreases, that variable is worth a second look. At the onset in the particular case study, the client is able to produce a withdrawal rate of four percent; however, upon raising the rate of return by one percent, as well as decreasing the standard deviation by two percent, the investor’s withdrawal rate actually climbs to 4.5 percent.

Delaying retirement: In another analysis of the same portfolio model, the author estimates how retirement income will change if the investor works 30 years versus 28. The outcome almost mirrors the previous performance study in that the withdrawal rate climbs to 4.5 percent from four.

Inflation growth: For the third analysis, the author focuses on inflation and lowering the portfolio’s estimated three percent annual hike to one percent, then two percent as a deficit. In allowing inflation to grow faster than consumption, the investor is able to reach a 5.1 percent withdrawal rate. Experts like past Retire With Purpose podcast guest, David Blanchett, see trends of retirees spending less in retirement over time, and not need to keep pace with changing inflation. However, every retiree has their own unique financial situation, and it simply comes down to truly recognizing how your needs might change over time.

My advice: Stress-test your plan! Too many retirees throw a few simple historical figures into a spreadsheet and neglect testing the plan with multiple scenarios. If you don’t do this, you may be missing out on opportunities, or serious risks that could be mitigated before it’s too late.