Withdrawal rates have long been a source of discussion--and at times, controversy--within the financial advisory industry. One of the thought leaders in this area, Jonathan Guyton, principal at Cornerstone Wealth Advisors Inc. in Edina, Minn., posits that a withdrawal rate in the 5.5% area--give or take a half percentage point--can be appropriate, particularly if small midcourse adjustments are made in response to market conditions.
Beyond that, Guyton believes people tend to manage their ability to have a successful or comfortable retirement in monetary terms without thinking about what he calls "lifestyle dividends."
"One of the key elements to retirement planning is discovering the things people are passionate about and places in the world where they want to make a contribution," Guyton says. "When you have something to keep your blood flowing, you're engaged and not spending money trying to find things to alleviate the boredom. And a plan with less spending will have a better outcome."
For some clients, Guyton says his firm divides their total portfolio into a core portfolio to fund regular retirement expenses and a discretionary portfolio to meet various spending needs that arise beyond established income payments. The latter account is set aside in a managed portfolio of equities and fixed income with allocations that depend on a person's time horizon, and it ideally represents 5% to 10% of the overall nest egg. "It's a way to take out money in a way that follows the best practices and research that helps ensure the money will be there for clients over the long haul," Guyton says.
He adds that the discretionary portfolio has two rules. First, clients can use it for anything they want. Second, once it's gone, it's gone unless the client falls into an unexpected windfall or takes normal sustainable income from the core portfolio and puts what he doesn't need into the discretionary portfolio.
As for what constitutes a comfortable nest egg, Guyton offers that a person in his mid-40s probably needs about $2 million by retirement age to have the same purchasing power with his portfolio withdrawal stream as a person today with $800,000.
Taming Volatility
The unnerving financial collapse of '08-'09, coupled with fears that market volatility will be more commonplace going forward, made a lot of investors jittery about the long-term health of their portfolios. Michael Henkel at Envestnet believes that annuities, along with alternative investments, commodities and basic diversification, can help mitigate those fears.
Henkel offers that the collective aversion to annuities is a mistake. "I'm not talking about variable annuities, which are kind of different beasts," he says. "I'm talking about annuities that are really more mortality pooling vehicles. There's an underuse of these long-term longevity, guaranteed payout products by both advisors and investors. These types of products should be in the mix, just like you wouldn't consider a portfolio without stocks and bonds."
Henkel says annuities, in tandem with some sort of systematic portfolio at a given risk level, will maximize the investor's probability of not running out of money while he's alive. He notes that Envestnet is putting a single-premium, immediate annuity onto its platform that's commission-free. "Annuities are beginning to change," he says. "Carriers are creating products that appeal to fee-based advisors.
"If you have guaranteed payment every day for the rest of your life, that and Social Security can cover a good portion of your monthly fixed costs, enabling you to take more risk with the rest of the portfolio," he continues.