Our Approach to Retirement Income

I made plenty of calls to retired clients early in 2023 that sounded like this:

“It’s Vince. I’m calling with news you might not like.”

“Go on.”

“Last year was a bit of a mess. The growth-oriented stuff in your account took it on the chin, but, for the first time in a very long time, the boring stuff took it on the chin too.”

“We’ve seen our statements, Vince. And you let us know many times that it was ugly out there. We get it. We’re not happy, but we get it.”

“Well, it was so bad I’m suggesting you take less income from your accounts this year. 10% less to be exact. Don’t get me wrong, I can keep sending you the same amount as last year, but that could strain your investments.”

I’d get one of two comments.

1. “Fine. We can get by with 10% less from our investments.”
2. “What do you mean ‘strain my investments?’”

My response to the first comment was straightforward: “The market goes up a lot more than it goes down. But history says this pay cut should be temporary.”

The second comment was a bit tougher: “You run the risk of taking out too much money resulting in your accounts going to zero before you die.”

Most people took the pay cut at that point. They didn’t like it, but they understood it. Older clients said, “to hell with it, I don’t have much time left anyway.” So be it. That’s their call to make. I’m not here to argue with someone about how they spend their final years.

That’s our approach to retirement income. Here’s how it works. 

Start with a reasonable withdrawal rate, we like 5% of the value of all investment accounts, then adjust based on reality. If a bad market pushes that rate above 6%, you take a temporary pay cut. If a good market drops it below 4%, you give yourself a raise.

That's it. Here it is with numbers.

If you retire with $1M and we start at 5%, that's $50,000. Your investments drop 25%, now you have $750K but you’re still taking $50K, that's more than 6%. We broke the guardrail, so we cut to $45K. Two years later, markets recover, your account is worth $1M again. We start sending you $50,000 again. (And yes, excessive withdrawals, like taking an extra $50,000 for a new car, can also break guardrails.)

It works the other way too. Retire with $1M, drawing $50,000/year. Your investments have a good year or two, and even when including the $50K you withdrew, your account is now worth $1.26M. $50K is less than 4%. We broke the guardrail, so next year—if you want—we start sending you $55,000/year.

The beauty is in what it prevents: you'll never stubbornly withdraw yourself into oblivion, and you'll never die with a pile of money you were too scared to spend.