Spending Trumps Asset Allocation

Written by The Dividend Guy on April 17, 2008

Retirement

It doesn’t matter how good your asset allocation is or how well your investments have done, if you spend too much in your retirement your portfolio will fail. Although I am nowhere near retirement, I saw a recent graphic presented by Investment Advisor titled, “Spend Like There is No Tomorrow”>. In this article the author discusses the very serious implications of withdrawing too much from a portfolio too early. A 2% increase in withdrawals can cut your probability of meeting your retirement needs by 50%.

Have a look at the graphic below. It presents three different portfolio allocations and three different withdrawal rates on those portfolios. The effects are quite dramatic.

Spending Trumps Asset AllocationClick to Enlarge

Originally I quickly glossed over this article and didn’t give it much thought. I saved it in my bookmark folder where links go to die (but are saved for some reason or another) but found myself thinking about it later in the evening. It occurred to me that even for someone like me in my accumulation phase of my portfolio and years away from retirement this matters. It matters for two reasons:

1. Just because you retire does not mean you can have a free-for-all livin’ la vida loca. The sound spending habits you hopefully developed to get to the point that you can retire need to continue on.
2. The more money you put away today means that the more you can potentially withdrawal in retirement - 3% of more money in your portfolio is more money for you to spend!

I harp on the importance of asset allocation a lot on this site and have made great strides to ensure that it is sound and based on quality research. However, I also now realize that I need to sock away as much as I possibly can to make sure that 3% withdrawal rate is a significant sum of money. Back to the grind…

(Photo Credit: Walter Groesel)


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4 Comments so far

  1. Dividend growth investor April 17, 2008 8:10 am

    I would recommend reading this article from the guy, who invented the 4% rule in retirement.
    http://www.fpanet.org/journal/articles/1994_Issues/jfp1094-art9.cfm

    I am in the same situation as you DG. And I do not want to outlive my money as well.. So a 3% - 4% withdrawal should be safe..

  2. Dividends4Life April 17, 2008 1:12 pm

    Dividend growth investor: Thanks for the link. I have seen this article quoted, but had never ran across the original text.

    Best Wishes,
    D4L

  3. Dividend growth investor April 17, 2008 3:09 pm

    Dividends4life,

    If you type this guy’s name in google and go to his wikipedia page, you will find all his articles referenced there. He even has a book, which didn’t have any listings at amazon.

  4. The Dividend Guy April 17, 2008 4:58 pm

    Yes, thanks DGI - that is a good link.

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