Many investors tend to underestimate their life expectancy, and in doing so miss a critical element in the calculation of future income. To avoid running out of income or assets, you need to know what you have to start, how much you spend and how long it needs to last.
A recent study by Actuarial Consultants based on 2013 mortality rates for people who do not hold annuities showed that half of all 65-year-old men will live to 86 years, and half of all 65-year-old women will live to nearly 88. A quarter of 65-year-old men and women will survive to over 90 years old.
There is no rule of thumb as to how much can be withdrawn safely from a portfolio. How could there be? It depends on your age, your portfolio value, your life expectancy and the performance of your particular mix of investments.
Income issues are also of particular concern to a surviving spouse. In many cases a surviving spouse will lose either her own or her spouse’s Social Security. Often a pension, which has provided a significant portion of a married couple’s income, may be reduced by 30 percent, 50 percent, or even ended completely. Here are a few easy calculations you can make to help you better understand the income challenges you may face.
Begin with a review of your current sources of income, excluding withdrawals from investments. Then, in a second column, calculate how these will change if one spouse dies. Adjust both Social Security and pension income, if appropriate. Then, make a reasonable estimate of your spending and consider how this may change if you are a surviving spouse. Be sure to include both recurring expenses as well as periodic expenses such as home and vehicle maintenance, travel and vacations. Strive to be realistic, but use estimates. This is not your budget; you needn’t be exact, just reasonable.
Subtract one from the other and you will be able to see how much, if any, will need to come from your investment portfolio. Divide this amount by the value of your investment portfolio to derive a withdrawal percentage.
For example: You receive Social Security of $900 a month and your spouse receives $1,500 a month. Your spouse’s pension is $2,000 a month and has a 50 percent survivorship benefit. You are currently withdrawing $2,000 a month, or 3 percent, from your $800,000 retirement fund, giving you a total income of $6,400 a month, which comfortably covers your expenses.
As a surviving spouse you would probably retain the larger Social Security payment of $1,500 a month, but lose the other. Your pension income would drop to your 50 percent survivor benefit, or $1,000 a month. If your living expenses of $6,400 a month remained the same, you would have to increase the withdrawal from your $800,000 retirement account from $2,400 a month, or 3 percent, to $3,900 a month, or 5.9 percent, just to maintain your present lifestyle. And of course, we haven’t even factored in inflation. Does it make sense that the same investments which could support a three percent withdrawal would be adequate for your new situation?
An accurate and well thought- out written investment and income plan can take these variables into consideration and craft a balance of different investments that has the best potential to be successful for you, that is to say, to make your income last longer than you and your spouse.
Steven Weber is the senior investment advisor and is Gloria Harris Director of Client Services for The Bedminster Group, providing investment management, estate and financial planning services. The information contained herein was obtained from sources considered reliable. Their accuracy cannot be guaranteed. The opinions expressed are solely those of the authors and do not necessarily reflect those from any other source.