I want to share with you something called the 98% solution and why this is important to you. We recognize how hard it is to generate retirement income, especially in today’s low interest rate environment and low expectations in the stock market. While you are working and putting money into your retirement plan, you are growing the size of your portfolio. Eventually, you get to a point where you have enough money saved and are ready to retire. What most of our clients are looking for when they reach this stage is protecting their principle so they can live off the income they have saved. Traditionally, that amount of income is 4%, which is challenging to achieve in today’s market.
A study from Morningstar proposed the question of whether or not you can achieve 4% out of a portfolio. They found you cannot take 4% out of a portfolio, in fact, if you try to set up a balanced portfolio, meaning roughly half stocks and half bonds, and you take 4% of income, that you have a fifty-fifty chance of your money lasting for a 30 year retirement. Morningstar shared that if you want to have a 90% chance of having your money last throughout your retirement (30 years) you can only take 2.8%.
The problem that is happening today, and what Morningstar found in their study, is that if you have a balanced portfolio, you are adding risk to your money. As we know, the market is volatile, where we experience both up and down years, and the down years are the ones that have the most impact on your portfolio. When you are pulling money out during a down year, it devastates your portfolio, and you may never recuperate. If you set up your portfolio correctly, studies show that even in today’s low interest rate economy, you can generate up to 4.5% income that will last 30 years, and it will last up to 98% of the time, what we call the 98% solution.
Tune in this Sunday on KTVN Channel 2 News at 5:30 p.m. as we talk more about the 98% solution and tips on how to set up your portfolio appropriately so you can generate an income that will last a 30 year retirement.