Retirement Withdrawal Strategy: I am 60 with $1 Million, can I safely withdraw $75,000 per year?

 

Averages in Retirement:

Mark Elliot: I’m glad you’re with us today for The Retirement Income Show with Troy Sharpe, the CEO and founder of Oak Harvest Financial Group. I’m Mark Elliot. You can always go to the website oakharvestfinancialgroup.com, oakharvestfg.com. A lot of great information about Troy, the team, great information on the website about their process, the retirement success plan, just tons of great information.

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It’s a great opportunity for you to learn, just in your own free time. YouTube, Troy Sharpe, Oak Harvest, there you go. I’m Mark Elliot. Glad you’re with us today. Of course, any questions, you can always call the team. If you just say, “Look, I want to talk to somebody. I want to find out where I’m at in my retirement. Can I retire? When can I retire?” All of that. 800-822-6434 is the number. 800-822-6434.

Troy, you’re throwing out a scenario, 1969 to 1999, the markets averaged about 13% during that time. You said, really, for investors, it was probably an average of a little over 11%, and that was a super high-inflationary period in the ’70s and ’80s. It was 18% inflation, and it was double-digit interest rates at the bank. Put money into CD, get 12%, 14%.

Really interesting time, but you’re saying it was a great time when you’re averaging 13% over that time period, actual investors probably a little over 11%. There are scenarios you’re going to delve into to explain that.

 

Troy Sharpe: Yes. Bonds averaged about 8%, so stocks a little over 13. If you had the 60/40 portfolio, you averaged right around, let’s call it 11%. Over a 30-year period, 60/40 stocks bonds, inflation was running a bit harder than 5%. We started to get into the multiple scenarios there, and this is an important point because some of the parallels that we have today are similar, but there’s absolutely an entirely different dynamic going on across multiple fronts, but some of the similarities from back then exist today, and some absolutely do not, mainly the interest rate environment.

I want to look at this one example, though, because I asked you, Mark. I said if you could lock in over the next 30 years, average, let’s say you had $1 million, and you were pulling out– If you can average 11.5%, you can safely pull out about $75,000 and your money should last all the way until age 90, assuming about a 5% inflation rate, so a cost-of-living adjustment of about 5%.

Now, I asked you, if would you take that 11% average annual return, and you said yes. Most people listening, most peo

ple watching on YouTube right now would say, “Yes, Troy, sign me up. If I can average 11% over the next 30 years with a 60/40 portfolio, I would be happy as I can be.” The truth of the matter is, and you know this, Mark, the average rate of return is completely irrelevant when you start the distribution phase.

Now, if you look at the actual, chronological order of those returns from 1969 to 1999, first the markets went down in ’69, then we had the market crash of ’73 and ’74. We had a little bit of a rebound after that. Then the market came back again at that what we call the linear withdrawal rate.

 

Mark Elliot: Probably the best time of that time period, ’69 to ’99, would’ve been the last decade of that. ’90 to ’99 was great.

 

Troy Sharpe: Well, the last 20 years of that. That’s the point. If you take out that withdrawal, you run out of money– If you retire at age 60, you run out of money by age 72. From, let’s call it 1982, 1983 to 1999, probably the greatest 15, 17, 18-year period in stock market history, your accounts are worth such little value, you’re not able to benefit from the amazing 20-year bull run that we had.

It’s not about what that account averages over that 30-year period, it’s what are the returns that you experience, especially in the beginning years of retirement, but really throughout all the years of retirement. If you’re taking distributions and the market is going down, that compound effect of subtraction of value due to withdrawals, combined with market losses, is what we call the sequence of returns risk.

In that scenario, if you actually look at the chronological sequence of returns from 1969 to 1971, pulling out that safe withdrawal rate, you run out of money, your portfolio, your $1 million is completely exhausted. At that point, you’re 72, 73 years old, and looking for work ultimately, or just living off social security.

 

Mark Elliot: If you did the same scenario instead of ’69 to ’99 and did like ’80 to ’09, then the next 15, 20 years are phenomenal. The last 10 years are terrible because of the last decade, 2009, but because we started great, we’re probably in great shape.

 

Troy Sharpe: Well, we did. We looked at it, yes. You don’t even have to cut out the bad years there. If you just flip-flop from 1999 through 1969, meaning if you look at 1999 being the first year of retirement and then ’98 being the second year, then ’97 being the third year and reverse sequentially, go down there to 1969, just reverse the order there, that $1 million, keeping up with inflation, taking 75,000 out a year, increasing at 5% a year, because that was the inflation rate over that 30-year period, that same $1 million that you started retirement with exceeds $10 million towards the end of retirement. Then once you hit in reverse order, ’73, ’74, then 1969, gets down to about $8 million, but that’s still eight times your original deposit. At that age, in this example, you’re pulling out more than $350,000 of annual income. You’ve pulled out millions of dollars of income over that 30-year period combined, and you’re still left with $8 million bucks.

The same average rate of return. If you go from 1999 to 1969, it’s 11.5% average returns on a 60/40 portfolio. Stocks did a little over 13, and bonds did a little over 8, but if you go in the correct sequence from 1969 to 1999, still averaged 11%, but that $1 million is exhausted in 12 years. Whereas in that reverse sequential order, that $1 million is worth over $8 million.

The parallels are, first, we have high inflation. Now, I don’t expect 8% inflation to continue for decades. I doubt that we’ll have 5% average annual inflation over the next 30 years, but inflation is such a powerful concept. We ran an analysis recently, and if you’re plus or minus 0.5% on your assumption for average annual inflation rates, a portfolio can exhaust up to nine years sooner.

Just going plus, let’s say we assume inflation’s going to be 3%. If 30 years from now it’s actually averaged 3.5%, so our assumption was half a percent off, your portfolio could be expected to exhaust nine years sooner due to that extra one-half of a percent of inflation being higher than projected. Inflation, we can’t control, but it is one of the most powerful– it impacts your retirement, how long your money will last, how much you spend more than any other factor, more than the rate of return, more than, to a certain extent, more than the rate of return.

Now, obviously, if you went negative 50, negative 50, negative 30, that’d be pretty bad, but it’s a very, very powerful component of the overall outcome when it comes to retirement planning, and that’s why we need what we call the retirement success plan. It’s a thorough process that takes us from step one, risk management, risk planning, and investment selection, to step two, generating an income strategy. How much income?

 

 

I’m a big believer in seeing you spend as much money as you can without the fear of running out. I want you to have what we call a dynamic spending plan in retirement.

I don’t believe in the 4% rule. The 4% rule is antiquated, in my opinion. It was developed in the late ’70s when bond rates were much higher than they are today. Similar to the story I just went through from 1969, when bonds were– From that 30-year period, from ’69 to ’99, bonds averaged 8% a year.

That’s because they were paying high-interest rates, but also, as interest rates in the market environment came down over that 30-year period, bond values increased. People had massive capital gains on top of very high-interest rate payments or coupon payments with their bonds.

We’re in the exact opposite environment now, where rates are still relatively low compared to where they were back then. Rates are increasing, and when rates increase, your bond values drop.

We can’t take research from the late ’70s, early ’80s and apply those same general rules to your withdrawal strategy today.

Now, I’m not saying you have to take less. A lot of academics will tell you, yes, well, you need to– the new rule is 2.5% or 3%. Now, yes, if you don’t have a plan that you’re monitoring if you don’t have a dynamic spending plan if you don’t have– If you’re trying to do this yourself, yes, I would say probably 2.5%, 3% is a safe way to do it.

I want to see you spend more money, not less, in retirement. We call it the retirement success plan because retirement is about so much more than just the X’s and O’s, the money, the finances. It’s how– This is my opinion, how can we spend the time with the people we love?

How can we enhance that time? How can we use money as a resource to improve our lives, to improve the quality of our lives, but to improve the quality of the lives of the people around us that we love, that we want to see have happy lives, be taken care of?

How do we do things together? Can we go here? Can we spend time? Can I pay for the kids to come? Can I pay for the grandkids to come? What about the kids’ spouses? I want us all as a family to get together. Can I afford that, Troy? Is that something that I can do with the money that I save for retirement? Not just looking at the picture today but extrapolating all these numbers out over a 30-year period. If I do that, how does that impact me?

Those are the questions I want you to ask when you come and sit down with an advisor here because that’s how we want to plan for you.

We want you to spend more money in retirement, not less, but we can’t do that without a dynamic spending plan. We have clients that whose starting distribution rate is maybe 5%, and maybe 6%, but you can bet your bottom dollar that we have a plan for the back end. If things don’t go our way, first, we’re going to adjust that spending rate as time goes on based on bull markets, bear markets, et cetera.

We have a plan for the back end to make sure that we have enough, we call it baseline income planning from guaranteed income payments to make sure that, “Hey, if things don’t work out, I have 80,000 of increasing income coming in, no matter how long I live,” or whatever that number is.

This is a dynamic spending plan, and step two of the retirement success process, we want to deliver you your own customized retirement success plan, but you have to reach out to oakharvestfinancialgroup.com, give us a call, 1-800-822-6434. This is The Retirement Income Show from Oak Harvest Financial Group.

 

Mark Elliot: When we come back, Troy’s going to chat a little bit about the Secure Act 2.0. Do you understand the moving parts of that? We’ll explain right after this.

 

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