Retirement Planning: When You Have to Compromise

Sometimes things fall into place nicely, and you can chart your course to a comfortable retirement relatively easily. You choose a suitable asset allocation, using tax-deferred accounts to their best advantage and optimizing your Social Security payouts. But what if things don’t work out so well?

Then you have to review your starting assumptions: your retirement date, your spending level and (if you’re still working) your savings rate. These may lead to less-comfortable planning choices, but compromises here can help ensure that you’ll have everything you require to meet your spending needs in retirement, even in dismal markets. That is, making compromises can help you meet your core-capital requirement.

The Power of Spending Less
Suppose that instead of asking “How much core capital do I need?” you ask a different, but related, question: “How much can I sustainably spend from my portfolio?” Your age and asset allocation and prevailing market conditions will all have a large impact on your answer, as the display below shows. 


Sustainable Spending Rates Are Driven by Multiple Factors

Given today’s market conditions, we estimate that a 65-year-old couple with a moderate asset allocation can sustainably spend 3.4% of their initial portfolio each year, grown with inflation. That’s less than the 4% spending rate we estimate would be possible under “normal conditions,” because we foresee lower stock and bond returns going forward than in normal markets.

Now we can start turning dials. Assume, for example, that the couple can postpone spending from their investment portfolio for another five years. We project that, at age 70, they’ll be able to get much closer to that classic 4%-withdrawal bogey. If they wait those extra years and ramp up the risk in their portfolio, they’re virtually at 4% (though they’d probably feel uncomfortable about holding a very stock-heavy portfolio at that point in their lives).

Work Longer?
Delaying retirement may not be a pleasant decision to make, but it can have a big impact on sustainable spending once you do retire, for two reasons. It gives your portfolio additional years to grow, and the portfolio will not have to last as long. These are intuitive concepts, but let’s anchor them in some numbers.

Suppose a 55-year-old couple had always expected to retire at age 65—but they’re not on track to reach their core-capital requirement until age 67. The display below shows that working those two extra years can get them to their funding goal.

Working Longer Allows Greater Portfolio Growth  

Saving More
But what if the couple hates the idea of working until age 67—or wants to retire earlier, say at age 62? Can they possibly advance their retirement by three years? The answer is yes—if they save more until retirement.

By saving 5% of their portfolio’s initial value annually, grown with inflation, we project that the couple can meet their new goal. Still, saving that much—$50,000 a year, adjusted for inflation for every $1 million in their initial portfolio—is a high hurdle to clear. Should they do it? The choice is theirs to make; it may or may not be a sensible path for them.

These hypotheticals illustrate that retirees and those approaching retirement have key “levers” at their disposal. Getting what you want in retirement is not a matter of luck and it’s not the product of a computer-driven black box. It may require making some difficult trade-offs—but it may well be within your power to reach your goal.

For more information, read our recent black book, All the Right Moves: Retire with Confidence.

Bernstein does not offer tax, legal or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions.

The Bernstein Wealth Forecasting SystemSM uses a Monte Carlo model to simulate 10,000 plausible paths of return for each asset class and inflation, producing a probability distribution of outcomes. It projects forward-looking market scenarios, integrated with an investor’s unique circumstances and taking the prevailing market conditions at the beginning of the analysis into account. The forecasts are based on the building blocks of asset returns, such as yield spreads, stock earnings and price multiples. These incorporate the linkages that exist among the returns of the various asset classes and factor in a reasonable degree of randomness and unpredictability.

Kathleen M. Fisher

Head, Wealth and Investment Planning Group; National Managing Director
Kathleen M. Fisher was appointed Head of the Wealth and Investment Planning Group in 2014. In this role, she leads the team responsible for developing and communicating asset allocation advice and investment strategies for Bernstein’s high-net-worth clients. Since 2013, she has also overseen research on investment planning and wealth transfer issues facing high-net-worth families as well as endowments and foundations. Fisher joined the firm in 2001 as a Senior Portfolio Manager and member of Bernstein’s Private Client Investment Policy Group; she was appointed a National Managing Director in 2009. Before joining Bernstein, she spent 15 years at J.P. Morgan, most recently as a managing director advising banks on acquisitions, divestitures and financing techniques. Earlier in her career, she was an equity analyst at Morgan Stanley, covering bank stocks, and an economic research analyst at the Federal Reserve Bank of New York. Fisher graduated Phi Beta Kappa from Bates College with a BA in economics, magna cum laude, and earned an MBA in finance from New York University. She is a former trustee of Bates College and currently serves on the boards of Southwestern Vermont Health Care and of Hildene—The Lincoln Family Home.

Tara Thompson Popernik, CFA, CFP®

Director of Research—Wealth Planning and Analysis Group
Tara Thompson Popernik was named the Director of Research for the Wealth Planning and Analysis Group in 2011 and is responsible for leading research initiatives on investment planning and asset allocation issues facing high-net-worth families, family offices, and endowments and foundations. Previously, she was a wealth management specialist, and before that she was a senior investment planning analyst. Prior to joining the firm in 2003, Popernik was a paralegal in the Capital Markets Group of Cadwalader, Wickersham & Taft. She earned a BA with honors in comparative literature from Dartmouth College. Popernik is a Chartered Financial Analyst charterholder and a CERTIFIED FINANCIAL PLANNER™ professional.

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