: Alexander, one of the biggest risks you and Evelyn face is inflation risk. For years, inflation has not been a big consideration for retirees because it has remained low, so we barely noticed rising prices. But that’s changing, and your investment plan must take it into account.Article content
Start by considering withdrawal rate risk. Given your ages and the length of time you are likely to be dependent upon your portfolio for income, I suggest you and Evelyn draw between 3.2 per cent and four per cent of your capital as a loose guideline. Here’s a real-life example. The S&P 500 averaged a 4.57-per-cent annual return from January 2000 through December 2020. Intuitively, you would think that if you were invested for all 21 years and withdrew exactly 4.57 per cent of your portfolio each year, you should have the same amount of money as when you started. After all, the markets averaged 4.57 per cent, and you withdrew 4.57 per cent. But that’s not what happens.
Your retirement income plan would have failed because the period started with three bad years: annual market losses of 10.14 per cent, 13.04 per cent and 23.37 per cent. Your investments would have substantially fallen in the first three years, and you would have been making withdrawals all the while. Your portfolio would have been cut in half, a hole from which it could never recover.