We know that meeting spending goals and managing risks depend in large part on the sustainability of assets. For retirements that depend on generating income through portfolio withdrawals, measures taken to increase portfolio longevity are paramount. These measures generally take the form of dynamic withdrawals, stock allocation, delayed Social Security claiming, variable spending levels, and integrating home equity. In combination or separately, they work to extend the life of a portfolio. Let’s review each in more detail to understand the role they can play in the longevity of your retirement portfolio.
Dynamic Withdrawals. Market volatility is an ever-present danger to any portfolio, but none more so than during retirement. This is because taking withdrawals from a depressed portfolio, especially early in retirement, raises the percentage of remaining assets withdrawn to unsustainable levels. An income strategy based on a market-sensitive withdrawal can adjust the withdrawal rate to a sustainable level to prevent portfolio depletion.
Stock Allocation. Contrary to popular belief, holding a decreasing amount of stock in retirement can shorten the life of a portfolio. This is because a low stock exposure will not produce returns at the levels needed to keep pace with inflation (i.e., cost of living increases). Left unchecked, inflation will cause ever-larger withdrawals from the portfolio to meet spending needs, thus shortening portfolio lifespan. The good news is stocks are the one investment proven to provide the returns needed to blunt the impacts of inflation. Recent studies suggest a steady or increasing stock allocation in retirement in the vicinity of 50% to 75% is superior to a declining stock allocation strategy.
Delaying Social Security. Postponing your Social Security claiming age to 70 increases lifetime benefits, produces more inflation-protected income, reduces portfolio withdrawals, and increases opportunities to build tax diversification. Of these benefits, reducing portfolio withdrawals is one of the most beneficial with regard to portfolio longevity. That’s because a higher Social Security benefit requires lower withdrawals from the portfolio, as more money outside of the portfolio is available to meet income needs. Delaying Social Security claiming age to 70 can increase the monthly benefit amount by 76% versus claiming early at age 62.
Variable Spending Levels. According to a study done by Morningstar, assuming level spending over retirement overstates income needs and shortens portfolio longevity. Instead of a steady spending level through retirement, spending resembles a “smile” pattern, where spending is highest during the first 10 years in retirement, lowest over the following 10 years, and rises once again late in retirement. Variable spending in retirement can increase the life of a portfolio.
Integrating Home Equity. Except for the wealthiest demographic, home equity represents 2/3 of retirement assets. This stat highlights the fact that making smart decisions about how to integrate home equity into a retirement income plan may be more important than decisions about how to invest and distribute other financial assets. These decisions can include spending home equity to extend the life of a portfolio. Studies show spending from home equity first can increase spending and legacy as the portfolio is given more time to grow as spending is supported by other income sources such as Social Security and home equity.
When incorporated into a retirement financial plan, these five measures can extend the life of a portfolio to support spending goals and manage risks, leading to a more secure and fulfilling retirement.