Trillium News

Spotlight on Your Portfolio

Fred & Flo Dogooder (fictional clients) recently retired with a $2 million investment portfolio. Healthy and 65, they’ve been living comfortably on roughly $100,000 per year. Excited but a bit apprehensive about plans for a long and active retirement, they feel fortunate to have a significant portfolio, but concerned about spending the assets they worked to accumulate. Also generous, they want to make significant gifts to family and philanthropy, ideally seeing the benefits of those gifts during their lifetimes.

They want to know: How much will they really need to live comfortably during retirement? How much can they prudently allocate for gifting, now and in the future? What’s the appropriate investment mix to meet family and philanthropic goals while maintaining ample assets for retirement?

I frequently have conversations with clients like the Dogooders about long term financial plans for retirement and other life events. Although most clients begin their relationship with us already having significant wealth, questions about having “enough” over the long term are still critical. The answers are based on a combination of these factors:

• Time horizons dictate how long assets must work to meet

expenses. At 65, Fred has a 50% chance of living to 85 or older;

Flo, to 88 or older. Planning for a 20-30 year retirement
is reasonable

• Spending rates can make the biggest difference between having

enough and not. Many people believe they’ll spend less after

retirement, but often the opposite is true.

• Taxes & inflation diminish asset values over time.

• Asset allocation across stocks, bonds and cash is the biggest

determinant of returns. Stocks historically have provided greater

growth and opportunity to outpace taxes and

inflation, but with greater risk. Bonds help protect principal and

provide a steady income stream, with less

opportunity for growth. A mix of stocks, bonds, and other assets can

be designed to balance principal preservation, income generation,

and moderate growth.

So back to the Dogooders. At 65, with a $2 million portfolio, they have an estimated time horizon of 25 years and project they can reduce annual spending to $80,000 in today’s terms. Their portfolio has a 60% stock/40% bond allocation, and for simplicity we’ll assume no taxes or portfolio transaction costs. With these assumptions, simulations based on a range of market returns and inflation scenarios show the portfolio has a 98% probability of surviving 25 years, with an average ending value of $5 million.

Now, if their annual spending increases during retirement to $120,000, the portfolio survival probability drops to 80%. If either Fred or Flo lives to 95 or beyond – increasing the time horizon to 30-plus years – the portfolio survival probability drops to 70%. This highlights the impact spending rate and time horizon can have.

Finally, the Dogooders are considering making $100,000 gifts to each of their 4 children and endowing a local environmental group with $100,000, for a $500,000 total portfolio withdrawal this year. Then, the remaining $1.5 million portfolio, with annual spending of $80,000, will have a 90% probability of surviving 25 years and 82% for 30 years. If annual spending is actually $120,000, those probabilities drop to 48% and 32%.

These probabilities are just that – statistical likelihooods based on historical data and today’s assumptions, which may change over the next 20-30 years. Regardless, this type of analysis can help investors like the Dogooders assess the future impacts of today’s decisions, and how they can best plan for “enough.”