You probably already know that retirement planning with a broadly diversified stock portfolio is simple, cost-effective and high-yield. Despite all the crises and stock market setbacks that have occurred in recent years, an ETF on the MSCI World has achieved an average annual return of eight percent over the last 30 years. An initial investment of 10,000 euros turned into over 100,000 euros.
But what happens next? What happens when you reach retirement age and you want to live on the money? Just like in the savings phase, a strategy is also important for the withdrawal phase. Various ways are possible here – all have their advantages and disadvantages.
The challenges are diverse:
- How do I make sure that the money actually lasts for the rest of my life?
- How do I make sure that I can calculate my additional pension well every month?
- How do I deal with market fluctuations?
- How do I continue to grow my money as I get older?
Withdrawal strategies for retirement
Let’s first look at the two extreme poles that there are. The simplest option is to sell everything before you retire and then divide the sum by the expected remaining lifespan, for example 30 years. This way I have a fixed amount available every month as I get older. If I die earlier, there will still be something left to inherit. It will become more critical if I live longer. Because then the savings will be used up. In addition, with this strategy I forego further asset growth. Especially at the beginning of retirement, there is a large sum in the account with low interest. Returns are being wasted here. Because age is not an argument against stocks. You still have the long investment horizon, which is important when investing, at the age of 60 or 70.
The other extreme is simulation calculations. Some see them as the silver bullet among extraction strategies. However, such calculations are hardly possible without the help of an expert. This involves calculating how different withdrawal amounts affect assets given different capital market developments. Customers then find out, for example, which monthly withdrawals are most likely to keep their money “forever”: the increases in returns compensate for the amount withdrawn. The result can then be, for example, that with an annual withdrawal of 3.3 percent of assets, the risk is just 0.54 percent that the money will be used up by the end of the planning horizon of 30 years.
Unfortunately, making this calculation alone is not that easy. Looking at the average return in the past, one might think that a pensioner can withdraw eight percent of the capital every year. However, there is what is known as “return order risk”. Average return means that there were years in which the return was higher and, above all, years in which it was lower. If a weak market phase begins right at the start of retirement, in which the stock market only increases by one or two percent or even shrinks, a withdrawal of eight percent is too high. The chapter then shrinks too much and may no longer be able to recover adequately – even if years later come with growth of, for example, ten percent.
How the stage strategy can be implemented
The so-called stage strategy moves between the two poles. It can be easily implemented without help and works in such a way that I first calculate how much money I will need in the next ten years. I take this sum from the deposit. The rest of the money can continue to grow. Shortly before the end of the ten years, I withdraw the amount that I will spend in the following years. The rest continue to multiply. The advantage: I can count on a secure additional pension over a long period of time, but still have the chance to build up my assets further in old age. I can also adjust the distributions to suit my plans. Shortly after retirement, I may still be fit and active and want to spend more money, for example on travel. Later, I can live well with a little less money because I will then have a less active retirement.
A modification of this idea is a concept that Stiftung Warentest calls a “flexible pension”. With the flexible pension strategy, investors divide their entire assets every year by the number of years remaining. For example, with 100,000 euros and a 30-year withdrawal horizon, the payout in the first year is 3,333 euros, i.e. 278 euros per month. Next year the calculation is repeated for the remaining 29 years, and so on. In this way, the pension amount reacts directly to the development of the stock market. After good stock market years, you can increase your pension. After bad stock market years, you also have to reduce your pensions. In their simulation calculation for a balanced portfolio (50,000 euros in MSCI World, 50,000 euros on daily allowanceaccount), Stiftung Warentest came to an average distribution amount of 613 euros per month. At the end of the observation period, however, the assets are used up.
Depending on the investment strategy during the savings phase, there is another option: the dividend strategy. Here your extra pension consists of the distributions from the companies in the portfolio. For example, if you have saved 100,000 euros and the dividend yield on your portfolio is three percent, you will receive 3,000 euros a year, i.e. 250 euros a month. Possible taxes and fees are not taken into account.
The charming thing: you don’t have to touch your portfolio. However, the fact that dividends flow irregularly can be a challenge. There are months with high payments and months with no payments. This is something you need to keep in mind when it comes to your spending. There may also be fluctuations in dividend payments.
More free stock market knowledge
More information on how you can put together a simple and good portfolio for old age can be found in my free PDF with valuable stock market knowledge. You will receive it as a thank you when you subscribe to my free weekly newsletter. Order here
2024-01-19 07:22:37
#Saving #retirement #money #age
