Monday, January 23, 2012

Retirees Just Got a Pay Cut

For years most financial advisers have been recommending that their clients can take 4%/year out of their portfolios. So a retired client with $1mm could supplement other sources of income with $40k/yr out of their investments. Now many advisers are starting to rethink 4% due to what has been going on in the market and their forecasts of lower rates of returns going forward.

The whole 4% rule was bound to break at some point, it puts tremdous strain on a portfolio to have to earn the 4% you are taking out and keep pace with inflation. Add in a double digit loss here and there and you have a real problem. A much better approach is to set aside 5-7 years of income into a conservatively managed tactical portfolio and leave the rest growing (also tacitcally managed to avoid the double digit losses) untouched for 5-7 years. Then you start the whole process over again.

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