Question: Now that I’m retired, I am no longer contributing to my retirement accounts. In fact, I am now taking distributions. That being the case, how is it that my portfolio grows in retirement?
Answer: Over the course of your retirement (and life), the market will experience many fluctuations. In the short term, your investments will go up and down, but over the long-term, your portfolio should see steady growth. For that reason, when planning for your retirement, we base our the projections on an average rate of return and a steady distribution rate. In other words, we do not change your distribution based on that year’s performance. Then, the distributions are essentially taken from the portfolio growth, rather than the principal so the investment itself remains intact and even grows.
To simplify the point, think back to the 1980s and even 1990s. Many seniors would live off the interest from their CDs. They might not see much growth, but the interest rates were high enough that in many cases, the interest on the CDs provided a nice supplemental income without ever having to touch the actual CD. Hard to imagine that considering CD rates today!
For that and a number of other reasons, your investment portfolio is more crucial than ever to your retirement planning. Let’s say you have an investment portfolio of $500,000 and we anticipate that you will earn an average return of 8% and will distribute 4% from your account annually. Perhaps you pay a 1% fee to your financial planner. That leaves 3% for the continuous growth of your portfolio. This is why we want to determine a “safe distribution” rate that will still allow your portfolio to grow despite that fact that you are now in distribution rather than contribution mode. For assistance developing an optimal portfolio allocation and safe distribution rate to meet your retirement goals, consider consulting a fee-only financial planner.