Withdrawal Rate Rule #2: You must have the right proportion of equities to fixed income so your retirement income can keep pace with inflation.
Your portfolio must have a minimum equity exposure of 50% and a maximum equity exposure of 80%.
If you fall too far out of this range, you run the risk of running out of money. Too much in equities, and volatile markets may scare you away at the worst time. Too much in fixed income, and your retirement income will not keep pace with inflation.
Below are three resources to help you pick the right allocation for retirement income:
- Read How Much Of My Money Should Be In Stocks Vs Bonds?
- For the experienced investor, online calculators can assist you with determining how much money to put where. Try the one put together by the Iowa Public Employees Retirement System.
- For the novice, it is best to seek qualified professional advice to determine the appropriate allocation.
Withdrawal Rate Rule #3: You must use a multi asset class portfolio to maximize your withdrawal rate.
Think of building a multi asset class portfolio just like creating a well balanced meal. Imagine, for example, sitting down to a sumptuous dinner of steak, shrimp, and baby back ribs. Although the meal has variety, it is not well balanced.
In the investment world, instead of food groups, you have asset classes. A well balanced portfolio contains, at a minimum, an allocation toward each of the following asset classes: U.S. equities (stocks or stock index funds), international equities, real estate and fixed income (cash, certificates of deposits and bonds).
To learn more about asset classes read the Beginners' Guide to Asset Allocation, Diversification, and Rebalancing.
A typical portfolio that would follow these withdrawal rate rules would have an allocation to all of the following:
- U.S. large cap stock index fund
- U.S. small cap stock index fund
- International index fund
- Publicly traded real estate index fund
- Long term government bond index fund
- Money market fund or shorter term certificates of deposit.
If you use funds and/or financial advisors that have higher expenses than index funds, than you may need to take a lower withdrawal rate to account for the higher fees you are paying.
