Investor Education – Financial Planning
Sustainable Spending
The amount that can be withdrawn from a portfolio to meet annual spending needs over the client’s lifetime, with adjustments for inflation. The concept of sustainable spending is an important consideration for many investors. A retiree may need periodic portfolio distributions to maintain a desired standard of living. Educational institutions and non-profit organizations count on distributions from endowment funds as a key revenue source helping to stabilize operations. Trust beneficiaries may rely on periodic distributions from a trust, usually approved by a trustee charged with balancing the interest of current and future generations.
How Much?
The key question in the above and similar scenarios is “how much”? What withdrawal rate strikes the optimal balance between the need for current cash distributions and the imperative of sustaining the portfolio over a long time period? There is no shortage of commentary on this all important planning concept. It is frequently covered in mainstream publications such as The New York Times and The Wall Street Journal, and is a staple of mutual fund, insurance company, and financial planning websites. Sophisticated computer models including “Monte Carlo” simulations and similar scenario analysis spreadsheets are used widely these days.
Our Recommendation
We think this is best analyzed carefully on a case-by-case basis with recommendations tailored to the unique circumstances of each client. Careful consideration of these and other factors may result in more flexible or more conservative recommended withdrawal strategies.
Considerations in Determining Sustainable Spending Amount:
- Time horizon: how long the retirement portfolio will be needed
- Legacy goals: desire to leave significant inherited wealth and/or charitable bequests
- Investor’s health and anticipated longevity
- Asset allocation: amount allocated in the portfolio to stocks and bonds
- Risk tolerance: balancing spending level objective with asset allocation
- Security of related income sources: Social Security, Pension, etc.
- Inflation protection
- Market considerations: stock and bond valuations at the time the portfolio is funded can critically impact the sequence of investment returns.
- Long-term risk factors: insurance coverage for probable risks (i.e. long-term care insurance)
Other Considerations:
- Taxes and investment fees
- Reliability of historical projections
- Other sources of income
For more information on this topic, please contact us. At Bartlett & Co, we assist high net worth individuals and their families in defining & reaching their life goals.