How much is enough?
By Lenore Davis
Clients often ask how much they can withdraw from their portfolio without impacting their future income stream.
According to the financial press, four to five percent seems to be the acceptable rate. This is a lovely, comforting idea, especially if your investment returns over the past 10 to 15 years have well exceeded that number.
What if four to five percent isn’t enough to meet your spending needs?
The answer depends on whether your spending is needs-driven or cash flow-driven. It’s the difference between “I can live on $7,000 a month,” “I need $7,000 a month” or “I’d like $7,000 a month.”
Spending patterns change dramatically with advancing years. At age 75, most people have done the “Grand Tour” and pursued their indulgences. Lifestyle spending tends to be reduced, and the focus turns more to helping the next generation.
During a person’s active earnings years, or pre-retirement years, a needs-driven model allows investors to determine spending patterns by identifying lifestyle and savings goals. The needs-driven model changes on retirement. At that time, savings goals usually disappear, and may be replaced by increased lifestyle spending or targeted estate-planning goals.
A cash-flow driven model in the pre-retirement years may be restrictive – “How do I get by on my take home pay?” Or it may be expansive – “What can I do to make the most of the cash I’ve got coming in?” The former requires a detailed examination of money management techniques and is usually linked to paying down debt while accumulating assets.
The expansive cash flow model encompasses current and future tax planning, charitable giving strategies, and introduces other creative solutions for increasing one’s net worth.
At retirement, the cash flow-driven model shifts to “How much can I spend…” followed by one of two tag lines “…without depleting my capital?” or “… so my last loonie falls out of my fingers as I draw my final breath?”
The difference between these two approaches may be characterized as choosing between an estate-driven solution and an asset-driven one.
Capital preservation forms the core of most estate plans. The difficulty in following the estate-driven model is the conflict between your current, sustainable, lifestyle- spending and determining how much this will translate to in future dollars. Sometimes, when the estate isn’t threatened by lifestyle spending targets, clients should give themselves permission to spend money in a way they’ve never done before.
The asset-driven solution is generally the choice of someone with a guaranteed life pension, a clear title home and no close heirs. Increased lifestyle spending needs are not threatening, since the asset-driven client recognizes spending patterns change over time and is prepared to divest assets to meet those spending needs.
How much is enough? That is a very personal question. The answer depends on the person and their changing circumstances. Our clients ask themselves this question regularly, and we work hard to make sure they understand the basis of our answer, “You’ve got enough. Go on… enjoy yourself.”
Lenore Davis has more than 20 years of experience in the financial planning industry and is a past president of the Institute of Advanced Financial Planners. Lenore is a Registered Financial Planner and a Certified Financial Planner with Dixon, Davis & Company in Victoria, B.C.
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