Smoke and Mirrors with a $1 Million Portfolio
Everyone wants more security for their retirement savings, and outside of Social Security, the most reliable way to achieve this is often the much-maligned annuity. The main issue for many people is losing control of a large chunk of their retirement pot—they simply don't like the idea. But what if you could get some of the security an annuity provides without giving up control of your cash?
No solution is perfect, but this idea might be of interest. I recently read about the perpetual withdrawal rate, a strategy that back-testing has shown will never run out of money. You could mentally set aside a portion of your portfolio and use the 2.5% perpetual withdrawal rate to act as a substitute for an annuity, possibly to fund your essential expenses. You would still have full control and full market upside, but with much more confidence in the money's ability to last your lifetime.
You could then use a guardrail strategy for the balance of your portfolio to fund your wants. Research has shown this flexible approach can support a higher withdrawal rate than the original 4% rule. The result would be a portion of near-guaranteed income combined with a higher, more flexible withdrawal rate for your discretionary spending.
How would this work with the commonly used million-dollar portfolio example?
Imagine you needed an extra $10,000 of essential income beyond your Social Security payments. You could apply the Perpetual Withdrawal Rate (PWR) to $400,000 of your portfolio to generate this secure income stream.
Then, with the remaining $600,000, you could apply a dynamic withdrawal strategy, starting with a 4.5% withdrawal rate. This would provide you with a discretionary income of $27,000.
Combining these two amounts gives you a total of $37,000, or 3.7% of your original portfolio. While this is a small reduction on the traditional 4% rule, it is a mental accounting method that could allow you to sleep soundly during market turmoil without compromising future growth or surrendering control of your cash.
This dual-bucket strategy might offer a solution to the retirement income problem for some, providing psychological security while keeping full portfolio control. By separating needs from wants, you gain confidence during volatility without sacrificing flexibility or growth. The 2.5% foundation is historically durable, while dynamic discretionary spending captures additional returns. This idea could provide greater peace of mind than traditional strategies with more flexibility than annuities…. although I could be just talking out my a*s. Anyone got some thoughts?
No solution is perfect, but this idea might be of interest. I recently read about the perpetual withdrawal rate, a strategy that back-testing has shown will never run out of money. You could mentally set aside a portion of your portfolio and use the 2.5% perpetual withdrawal rate to act as a substitute for an annuity, possibly to fund your essential expenses. You would still have full control and full market upside, but with much more confidence in the money's ability to last your lifetime.
You could then use a guardrail strategy for the balance of your portfolio to fund your wants. Research has shown this flexible approach can support a higher withdrawal rate than the original 4% rule. The result would be a portion of near-guaranteed income combined with a higher, more flexible withdrawal rate for your discretionary spending.
How would this work with the commonly used million-dollar portfolio example?
Imagine you needed an extra $10,000 of essential income beyond your Social Security payments. You could apply the Perpetual Withdrawal Rate (PWR) to $400,000 of your portfolio to generate this secure income stream.
Then, with the remaining $600,000, you could apply a dynamic withdrawal strategy, starting with a 4.5% withdrawal rate. This would provide you with a discretionary income of $27,000.
Combining these two amounts gives you a total of $37,000, or 3.7% of your original portfolio. While this is a small reduction on the traditional 4% rule, it is a mental accounting method that could allow you to sleep soundly during market turmoil without compromising future growth or surrendering control of your cash.
This dual-bucket strategy might offer a solution to the retirement income problem for some, providing psychological security while keeping full portfolio control. By separating needs from wants, you gain confidence during volatility without sacrificing flexibility or growth. The 2.5% foundation is historically durable, while dynamic discretionary spending captures additional returns. This idea could provide greater peace of mind than traditional strategies with more flexibility than annuities…. although I could be just talking out my a*s. Anyone got some thoughts?
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