A Guide to Making Investing Decisions

Are you confident your nest egg will be there for you in the years ahead?

Today's investor faces a changing economic landscape, and having a financial plan that keeps pace with the changes can be critical to achieving long-term financial goals.

Making sure an adequate nest egg will still be there for you in the years ahead takes discipline, knowledge, and a deep understanding of portfolio management.

Fisher Investments put this guide together to walk you through some tough decisions that could impact whether your portfolio will meet your future needs.

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How much money can you safely spend from your portfolio?

Once retired, investors often need to take cash flow from their portfolios. Unfortunately, many investors may not be able to safely draw the money they desire without risking depletion of their portfolios.

The tables below, using 30-year Monte Carlo simulations, provide a thumbnail analysis of the effects different withdrawal rates have on the probability of achieving two common investment objectives: providing cash flow needs for the duration of an investor's life (Portfolio Survival) and achieving an ending value greater than the initial value (Portfolio Growth).

Please note these are meant to illustrate a general point, not provide specific guidance to any individual investor.

Portfolio Withdrawal Rate Analysis

*Portfolio Survival and Growth are based on a 30-Year, 2500 iteration bootstrap Monte Carlo analysis. Portfolio Survival is defined by probability of surviving assets (>$0). Portfolio Growth is defined by probability of ending balance being greater than starting balance (>$1,000,000). Likelihoods defined as follows: “Very High” 99% or greater; “High” 85%-99%; “Good” 65%-85%; “Probable” 50%-65%; “Improbable” 35%-50%; “Unlikely” 15%-35%; and “Highly Unlikely” less than 15%. For illustration purposes only. Not intended to provide guidance to any individual investor.

What the Tables Reveal

These tables show the likelihood of portfolio survival and portfolio growth over various distribution levels and asset allocations.

If you take withdrawals in excess of 5% of the starting value of your portfolio for 30 years, the likelihood your assets will maintain their value across the full time horizon decreases substantially.

There are two primary reasons why distributions over about 5% of your portfolio, especially over long time horizons, place your assets at an uncomfortably high risk of early depletion:

  1. Inflation. Since investment returns are typically expressed in nominal percentages, real investment returns are likely to be several percent less per year than most people plan for.
  2. The compounding effect of taking large distributions in down years is often underestimated. For example, if a portfolio is down 20% and you take a 10% distribution the same year, you will need about a 39% gain the following year just to get back to even in value terms.

Making large withdrawals, especially early in retirement, increases risk of depletion substantially.

An important point to remember

As you plan future cash flow needs, it may be prudent to keep your cash-flow expectations below approximately 4% to 5% annually over your time horizon. This should keep the risk of portfolio depletion to a minimum. Reducing withdrawals even lower can greatly improve your portfolio's survival odds and increase the likelihood of achieving growth objectives.

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