June Tip of the Month
What are the probabilities of your retirement funds lasting 35 years?
An 80% stock, 20% bond portfolio success depends on the withdrawal rate.
A 4% withdrawal has an 85-90% success rate.
A 5% withdrawal has a 70-75% success rate.
A 6% withdrawal has a 50-55% success rate.
Source: https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/retirement-insights/guide-to-retirement-us.pdf. 80% stock/20% bond portfolio: U.S. large cap growth - 4.5%, U.S. large cap value - 4.5%, U.S. mid/small cap - 2.3%, U.S. REITs - 1.0%, Developed market equities - 5.5%, Emerging market equities - 2.3%, U.S. investment-grade bonds - 61.8%, U.S. high yield bonds - 12.3%, Emerging market debt - 4.0%, and U.S. cash. - 2.0%) J.P. Morgan Asset Management’s (JPMAM) model is based on their proprietary Long-Term Capital Market Assumptions (first 15 years) and equilibrium returns (20 years). The resulting projections include only the benchmark return associated with the portfolio and do not include alpha from the underlying product strategies within each asset class. The yearly withdrawal amount (1% to 10%) is set as a fixed percentage of the initial amount of $1,000,000 and is then inflation adjusted over the period (2.4%). The percentile outcomes represent the percentage of simulated results with an account balance greater than $0 after 35 years (e.g., “95-100” means that 95-100% of simulations had account balances greater than $0 after 35 years). Given the complex risk/reward tradeoffs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. References to future returns for either asset allocation strategies or asset classes are not promises or even estimates of actual returns a client portfolio may achieve.
Important Disclosures: The information contained herein has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made by RBC Wealth Management, its affiliates, or any other person as to its accuracy, completeness, or correctness. All opinions and estimates constitute the author’s judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Nothing in this communication constitutes legal, accounting or tax advice or individually tailored investment advice. This material has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The investments or services may not be suitable for you, and it is recommended that you consult your financial advisor if you are in doubt about the suitability of such investments or services. Past performance is no guarantee of future results.
This information is for educational purposes, is not a recommendation of any specific investment vehicle, and is not representative of the experience of any specific client. Asset allocation and diversification do not assure a profit or protect against loss. To the fullest extent permitted by law neither RBC Wealth Management nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of the information contained herein.
Bond investors should carefully consider risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. Non-investment grade rated bonds (high yield bonds) can involve significant credit risk, default risk and price volatility than investment grade rated bonds, and payment of interest and principal is not assured.
Stocks of mid-sized companies are more volatile than stocks of larger companies. These companies may have limited product lines, operating history and may rely on a narrower management team. Stocks of small companies are more volatile than stocks of larger companies. They can involve higher risks because they often lack the management expertise, financial resources, product diversification and competitive strengths of larger companies. Emerging markets are often characterized by even less economic and political stability, greater price volatility and lack of liquidity than securities associated with more developed international markets. Emerging Markets investments may not be appropriate for all investors. International investing involves risks not typically associated with U.S. investing, including currency fluctuation, foreign taxation, political instability and different accounting standards.
Specific sector investing such as real estate can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes, tax laws, and interest rates all present potential risks to real estate investments.
