Increase Your Retirement Income with One Simple Change
If you are thinking about retirement, you've probably heard of strategies such as the 4% Rule or Monte Carlo Analysis. The primary goal of these strategies is provide a sustainable retirement income where you have a reasonable chance of not running out of money. The problem? These methods focus heavily on worst-case scenarios, which can limit your retirement income more than necessary. But what if there were a way to increase your sustainable income in retirement by making one simple change?
The Problem with Traditional Withdrawal Strategies
The 4% Rule assumes that if you withdraw 4% of your portfolio annually (adjusted for inflation), you should have enough to last a 30-year retirement. The 4% Rule came about by looking at past performance of a portfolio of 60% equity funds and 40% bond funds. Limiting withdrawals to 4% allowed the portfolio to last 30 years in the worst market situations. Monte Carlo simulations similarly analyze thousands of potential market outcomes to determine your likelihood of running out of money. Both of these approaches are inherently conservative because they assume periods of severe market downturns that may or may not occur.
As a result, these methods often force retirees to withdraw less than they could, just to play it safe. The result? While you may not run out of money, you may have another problem. You didn't spend enough! You may pass more money to your beneficiaries than you ever planned at the expense of your retirement lifestyle. Money left unspent is life unlived!
The Case for Adding Non-Market-Linked Assets
By allocating a portion of your portfolio to a product that guarantees no losses, you can increase the amount of income you can safely withdraw. Here’s why:
- More Stability – By adding guarantees, you've improved the worst case scenarios. There is less volatility in your overall portfolio when combining market-based investments and assets with guarantees.
- Higher Sustainable Income – Because some of your money is protected, your overall portfolio can support a higher withdrawal rate. You've improved the worst-case scenarios and, in turn, increased your sustainable income.
- Peace of Mind – You’re not entirely dependent on market returns to fund your retirement and may feel more comfortable spending your hard-earned money.
How Does Adding Guarantees Help?
Remember that the 4% Rule and Monte Carlo Analysis both determine a safe and sustainable lifetime income based on the projected worst case scenarios. By removing market risk and adding guarantees to a portion of your portfolio, you can improve the worst-case scenarios. The largest drops in the market don't impact your total portfolio as much because some of your assets aren't seeing those losses. As the worst-case situations improve, so can your income.
By adding a guarantees to some of your assets, you may be able to effectively increased your total withdrawals without increasing your overall risk – in fact, you probably reduced your overall risk.
Options for Non-Market-Based Income
There are several financial products that can provide this stability. While each has its pros and cons, here are four options to consider:
- Annuities – Some annuities provide guarantees against losses (or even guaranteed growth), ensuring a more predictable cash flow no matter what the market does.
- Cash-Value Life Insurance – Some policies accumulate value over time that can be accessed tax-free, offering another source of funds during retirement.
- CDs or Treasury Bonds – While they don’t offer high returns, they provide principal protection and steady, albeit modest, interest income.
- Home Equity – Incorporating home equity into your overall retirement income strategy may provide more desirable results than merely using it as an asset of last resort.
The Bottom Line
Retirement income planning doesn’t have to be constrained by worst-case market scenarios. By shifting some of your portfolio to products that guarantee no losses, you can increase your sustainable income, reduce risk, and enjoy greater financial peace of mind in retirement.
While traditional strategies like the 4% Rule serve as a useful guide, they shouldn’t dictate your entire approach. Diversifying your income sources beyond the market can give you more confidence—and more money—to enjoy your golden years.
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