Spending Trumps Asset Allocation

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.

Click 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)