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If You're Retired, Your Reliance Rate Matters

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When it comes to your retirement, you want to create a strategy that allows you to do what you want – and not run out of money doing it. First, you’ll need to calculate how much income you need in retirement. Then you can add up how much you can expect from outside sources of income, such as Social Security and a pension.

Your investment portfolio will likely need to make up any shortfall. How much you rely on your portfolio for your retirement income is called your reliance rate. For example, let’s say you plan to spend $50,000 during your first year of retirement and expect your portfolio to provide $20,000 of this amount. In this example, your reliance rate would be 40% ($20,000/$50,000 = 40%).

Why Is Your Reliance Rate Important?
Your withdrawal rate – or how much you are withdrawing from your portfolio – helps to determine how long your retirement income may last. But your reliance rate helps to determine your potential sensitivity to market fluctuations. In other words, if you have a higher reliance rate, market declines could have a greater effect on your strategy.

For example, if you rely on your portfolio for 80% of your income, you’re likely to be more sensitive to market declines or “shocks” than someone who relies on his portfolio for only 20% of his needs, regardless of the withdrawal rate.

That said, your withdrawal and reliance rates are related:

  • The more conservative your withdrawal rate, the more you may be able to support a higher reliance rate.
  • The higher your withdrawal rate, the riskier a high reliance rate may be.

Ultimately, the higher your reliance rate, the more flexible you may need to be with your spending – especially if you have a higher withdrawal rate. Your financial advisor can work with you on maximizing outside sources of income, such as Social Security, to potentially reduce your reliance rate.

Retirement Reliability
Each investor has different goals for retirement – but all investors have one goal in common: ensuring their income provides for their needs as long as they need it. Seeking balance between your sources of income can help provide more stability and “reliability” to your income strategy. Contact your financial advisor today to help you review your retirement income strategy.

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