As a financial advisor, whenever I’m asked a question like this, my mind floods with a list of questions for more clarification. At first glance, the question seems straightforward. However, the answer is nuanced and requires several layers of analysis.
First, you must know if the $90,000 per year, or other hypothetical dollar amount, is before or after tax. Depending on whether or not the dollar amount is before or after tax will impact the answer and introduce different types of strategies to consider. In addition, the types of investment vehicles you hold are an important factor. For example, is your money tax-deferred, Roth, or taxable accounts? Tax-deferred accounts (401k’s or IRA’s are typical examples) will require income tax paid when you start withdrawing. On the other hand, Roth accounts can be drawn on tax-free and taxable accounts have an entirely different set of tax implications based primarily on capital gains. Many people have a mixture of all three types, and determining the right way to withdraw these funds and when is imperative to the longevity of the assets.
While withdrawing the funds and the tax implications are important, your risk tolerance within your investment plan is equally important. Historically, many retirees have gravitated towards a 60/40 portfolio comprising 60% equities and 40% bonds. This mix leaves enough equity to benefit from the long-term growth of its holdings while keeping bonds to reduce volatility and draw upon it in a down market. The correct answer is different for everyone, but the longevity of one’s assets is primarily driven by how one invests those assets. A simple example is if a person had $1 million and withdrew $90,000 per year, the math is easy in that it would be gone a little over 11 years from now. For simplicity’s sake, take that same person and assume a 9% rate of return from their portfolio. After 11 years, that $1 million is the same as it was in the beginning. The example is overly simplified, and there would be many other factors, but the point still stands. While investing will always require taking risks, not investing also involves risk, including the longevity of one’s assets and inflation.
The bottom line is that the answer to this question has many different facets, and working with a local CERTIFIED FINANCIAL PLANNER™ professional ensures that you are working with someone with the education, experience, and ethics necessary to answer this question. Take the first step in building a financial plan today by reaching out. See Why Valiant might be the right fit for you.
