What's the target?
The most important target to set in financial planning is to aim to have 25x your expected retirement living expenses, net of taxes, pensions, and social assistance, invested before you retire. The 4% rule states that generally, in retirement, you can draw 4% (inflation adjusted) from your investments, and maintain your capital throughout your lifespan. The long term real average of the stock market is ~7% returns, but during a withdrawal phase, sequence of returns risk becomes an important consideration. Why only 4%? Consider an individual with $1,000,000 retirement portfolio, planning to draw 7% per year. ($70,000) If this individual retires in a year like 2006, and draws $70,000 in a year like 2008 when certain equity markets are down by 50%, their portfolio would be reduced to less that 40% of it's original value in a single year. This level of loss would leave the retirement portfolio unsustainable at it's current withdrawal rate. In 1994, William Bengen's research showed us that even with the worst retirement timing, it is safe to draw 4% from your portfolio, and expect to maintain your capital for a 30 year retirement. Today, life expectancy keeps on improving, so considering working longer, or living on less than 4% might be necessary. Where to invest in retirement? Like any time in your life, asset allocation is highly personal. The drawdown phase of your financial lifespan is very different than the accumulation phase. During accumulation, you can afford to be exposed to far more risk. A good starting point is to hold about 2 years worth of expenses in a high interest savings account, about 8 years worth of expenses in fixed income securities, and about 15 years worth of expenses in diverse equities. This allocation of your 25 years worth of expenses divides out to a 60% equity, 40% fixed income allocation. As markets fluctuate, rebalance your portfolio to continuously maintain your desired allocation. This will result in always buying low and selling high as markets fluctuate. This is a general guideline, not a guaranteed plan for success. Copyright © Finanshalom. All Rights Reserved. The content of this website is for general education and informational purposes only. It is not intended as advice, and does not take into consideration your specific situation. Do not make any decisions based solely on the information found herein
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