You can retire safely — even if you don’t have tons of money

When people retire, they sometimes have a nagging financial worry: What if it turns out I don’t have enough money? Could I someday have to beg the kids to take me in?

In this article, I’ll show you how to avoid that unfortunate fate. 

Unquestionably, the best time to retire is when you have more money than you will ever need. But if that’s not possible, I’ll show you how to meet your needs and preserve your peace of mind.

This is part six in a series of articles I think of as Boot Camp for Investors 2024.

• The first article showed that over the past 96 years, investors were far better off in stocks than in bonds.
• In the second installment, we saw how even small changes in your stock portfolio can mean millions more dollars in retirement. 
• Installment three showed historical returns and risks of a variety of combinations of equity asset classes.
• In installment four, we discussed how to use fixed-income funds to limit your investment risk.
• Last time, installment five focused on the best ways to accumulate and invest the money that will become your retirement financial engine.

Now our focus is how to withdraw money once you’re retired. To avoid running out of money before you run out of life, you need a good plan that balances two important variables. Fortunately, they are both under your control:

• What percent you’ll take out each year
• How your portfolio is invested 

Financial planners often recommend annual withdrawals of 3% to 5% of your portfolio’s value. If you can meet your needs taking 3%, you’re unlikely to ever run out of money.

A withdrawal rate of 4% probably will be sustainable, based on history. However, if you need to take out 5% the first year and adjust that amount for inflation after that, your portfolio might not last as long as you do.

And yet, if your savings are less than ample, a 4% withdrawal rate might seem too skimpy. You might need 5% instead. So let’s start there, drawing on a set of tables I’ve published and updated every year since the mid-1990s.

These calculations assume you retired in 1970 with $1 million. With various combinations of withdrawal rates and portfolio assets, they show how you would have done if you took out a percentage of the portfolio value in 1970, then adjusted that amount every year to keep up with actual inflation.

To get started, let’s look at a table on my website with 10 columns that show year-by-year portfolio values for 5% withdrawals and various combinations of bond funds and the S& P 500 Index.

If you scroll down, you’ll notice some blank spots starting in the early 1990s. They show that some of these portfolios simply couldn’t keep up with the increasing demands for annual withdrawals.

All these combinations of 5% withdrawals and a portfolio based on the S&P 500 held up for the first 20 years. But none lasted for 30 years. That’s not good.

You can deal with this problem in two ways: Take out a smaller percentage, or adjust the equities in your portfolio.

What if you took out 4% instead of 5%? This table shows the answer: Every combination held up fine for at least 40 years.

Now we’re getting somewhere: peace of mind.

But that peace of mind comes at a cost: You have considerably less to spend in retirement.

So what if you went back to 5% withdrawals and then chose a different mix of equities? There are infinite possibilities for doing that. Here is yet another table, this one showing the hypothetical results if you decided to split your equities 50/50 between the S&P 500 and small-cap-value stocks, which have been more volatile but much more profitable in the past.

As you can see, so long as you had at least 30% of your portfolio in equities, every combination of stocks vs. bonds would have kept you going for not just 30 years, but for 40 years.

Here’s what happened: The superior long-term returns of small-cap value diversified your equity portfolio and protected it from some of the worst times for the S&P 500.

That extra return had two terrific benefits:

• During the first 20 years of your retirement, you had a total of $404,000 more to spend.
• Perhaps even better for cautious investors, you could dial down your risk (and dial up your peace of mind) by limiting the stock side of your portfolio to as low as 30%.

If you’ve followed all this (and there’s no reason to be embarrassed if you need to go through it again), you can see the value of starting with a basic plan and then tweaking it until you find a combination that seems right.

I do understand that many investors don’t want to get mired in hundreds of numbers of past returns. They want something simpler: A basic recommendation that’s likely to keep them out of major financial trouble.

So here’s what I believe is an excellent starting point for retirees who must make sure their needs are covered regardless of inflation.

There are three elements:

• First, plan to take out 4% of your portfolio to spend the first year of your retirement.
• Second, plan to adjust that amount every year to keep up with actual inflation.
• Third, invest half your money in government bond funds and the other half in the S&P 500.

This plan is likely to sustain at least a 30-year-long retirement. And with half your money in bonds and the other half in the S&P 500, your portfolio should give you a healthy dose of peace of mind.

As you can see if you return here, this combination was less than ideal for investors who started in 1970. But the 1970s was an unfortunate time to retire, with unusually high inflation and a bear market piled on top of each other.

The luck of timing plays a bigger role than we like to think. Investors who retired in 1980 or 1990 had luck on their side; but luck was against those who retired in 2000. You can control some things, but not the future.

Here are two key points to remember:

• Whatever the size of your portfolio, consider diversifying your equities beyond the S&P 500.
• And no matter how much or how little money you have available to spend, your retirement will be less stressful if you live a bit below your means, building a cushion to deal with the unexpected needs and opportunities that are sure to arise.

For more on this topic, check out my latest video or my podcast.

In more than half a century of helping investors, I’ve concluded that the single best thing you can do is begin your retirement with as much money as possible.

In the next Boot Camp article, I’ll show you how to spend even more in retirement without running out of money – providing of course that you have saved more than just the minimum to meet your needs.   

Richard Buck contributed to this article.

Paul Merriman and Richard Buck are the authors of We’re Talking Millions! 12 Simple Ways to Supercharge Your Retirement. 

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