Perpetual Income

As baby boomers enter retirement, their number one concern is to have enough income to maintain their lifestyle for the rest of their life, their spouse’s lifetime and maybe their dependents, especially if they have special needs. There are some alternatives, but most are expensive and you are dependent on some company that you have no input or control over. Specifically, you can purchase an annuity and/or life insurance. By doing so, you surrender the five most important parameters that we value in investing;

Control

Visibility

Accessibility

Liquidity 

Flexibility

One alternative is to purchase 30 year US treasury bonds and hold them to maturity, which will pay out the stated interest rate, which is state income tax free. Another important parameter is that they are the ultimate safe investment as backed by the US government, (but who knows how dependable it will be years down the road given its current socialistic direction of spending on entitlement programs). The major risk with this so call “risk free” investment is the impact of inflation, which will erode the purchasing power of your income down the road, as the US monetizes its debt by printing more and more currency.

At Quest Financial Services Inc., there is another technique that will provide your desired perpetual income for as long as you want, including your lifetime and the lifetime of your dependents. There have been a number of studies over the years that have statistically shown that the safe withdrawal rate for a managed portfolio is between 4.0% and 4.5%. Based on countless Monte Carlo iterations, this approach, if properly implemented has a probability of success of 97% to 100% of never running out of income. After the base year, each annual distribution is adjusted for the current inflation rate to maintain your purchasing power.

Before going into retirement and commencing this technique, one needs to determine the amount of monthly income that is needed in retirement. Start with your average monthly cost structure in the three years before retirement. Most retirees will need anywhere between 70% - 85% of their cost structure, once they enter retirement. We recommend approximately 80% of your pre-retirement budget as a starting point. Once you have that number, subtract your monthly social security payment along with any pension or annuity that you may be receiving. The difference is what you need to make up from your investments. Multiply this number by 300. That product is “your number” needed to fund your perpetual income.

As a simple example of this technique, assume your pre-retirement income is $10,000/mo. You should need about $8000/mo in the first year of retirement. Subtract your social security benefit of $2500/mo and $1500 pension payment. This will leave a $4000 difference to make up. Multiplied by 300 will calculate that you will need a nest egg of at least $1,200,000. A 4.0% withdrawal rate will yield $48,000 annually, or $4000/mo. After the first year, if inflation is running the historic rate of 3.0%, you would increase your withdrawal to $4120. As long as you are dedicated and disciplined, your nest egg should outlast you and your beneficiaries.

By taking this approach, you retain many advantages. First of all, you maintain the five most parameters of investing:

Control

Visibility

Accessibility

Liquidity and

Flexibility

Under a managed portfolio, there are several other advantages. If your investment results are positive, you can take special withdrawals for one-off purchases such as a car, travel, gifts or repairs or additions to your home. Another positive parameter is to take advantage of market opportunities or limit the downsize protections of alerts and stop loss orders. Also, you can be in control of your income tax effects by timing your withdrawals, sales and selective sales of certain investments.

If interested in setting up a perpetual income stream for your retirement and your beneficiaries, please call Quest Financial Services Inc. for a complementary consultation.