When it comes to your retirement, the typical goal is to enjoy your desired lifestyle and not run out of money doing it. To achieve this goal, you need to identify how much income you’ll need in retirement, how much you’ll receive from income streams like Social Security or a pension, and the role of your retirement portfolio in complementing these other sources.

But how do you know if you’re relying too much on your portfolio compared to your other sources of income? Here, we describe how to calculate your portfolio reliance rate and how to reduce it if needed.

What is your reliance rate — and why is it important?

How much you rely on your portfolio for income (versus your outside income sources) is called your reliance rate. Calculating your reliance rate is relatively simple. Say you want to spend $50,000 in the first year of your retirement. If $20,000 comes from your portfolio, your reliance rate would be 40% ($20,000/$50,000 = 40%). What does this mean?

If your reliance rate is high, your potential sensitivity to market fluctuations increases. In a down market, this may mean increasing your withdrawal rate from your portfolio to maintain your spending, which could impact how long your money lasts. Alternatively, you may need to reduce your spending to help your portfolio last as long as you need. The table below illustrates how having a higher portfolio reliance rate may require a significant reduction in spending to maintain your withdrawal rate.

Reliance rate illustration

Let’s assume you began with a 4% withdrawal rate, withdrawing $20,000 from a $500,000 portfolio. If your portfolio declined by 20% this year to $400,000, your portfolio withdrawal rate would effectively rise from 4% to 5% if you maintained your $20,000 withdrawal next year.

So, you can either temporarily maintain this higher withdrawal rate or reduce your spending. If you wanted to maintain a 4% withdrawal rate, you would only be withdrawing $16,000 from your portfolio (4% of $400,000). Depending on your reliance rate, as shown below, this could have a much bigger percentage impact on your overall spending.

The question is, how do you know if your reliance rate is too high? In some cases, a high reliance rate may be appropriate, particularly if you already have a low withdrawal rate and have significant spending flexibility. If this isn’t this case, though, you may consider ways to reduce your reliance rate. It’s important to work with your financial advisor and run scenarios to help you understand what changes may be necessary in years after a market decline in order for you to continue to be on track to reach your goals.

How to balance your reliance rate

Given the potential financial and emotional ramifications of a higher reliance rate, it’s important to build a foundation of outside and insured income. This income — from sources such as Social Security, pensions and income annuities — is unaffected by market fluctuations and can serve as a base for your income. The table below highlights characteristics that can help you determine what level of reliance may be suitable for your situation. 

Depending on your individual situation and the characteristics outlined in the table, you may be looking for ways to increase your outside income and lower your reliance rate. Here are a few ways to do it.

Delay Social Security

One of the most valuable sources of outside income in retirement is Social Security. Social Security is a benefit that provides lifetime income for you and potentially your surviving spouse, as well as a potential cost-of-living increase for inflation. Since benefits are reduced if you claim early and increased if you delay, it’s important to understand your options before claiming Social Security. Delaying Social Security (and therefore increasing your benefit) could be one way to increase your income from outside sources, provide a source of rising income and reduce the reliance on your portfolio. 

Utilize income annuities

Since fewer individuals have access to pensions, one way to replicate this type of income is through the use of income annuities. Certain annuities can offer guaranteed payments for life and can be used as income insurance by adding to your predictable income base.

Work part-time

Many new retirees decide to work part-time for a variety of reasons. Maintaining a schedule, fostering relationships with coworkers and having extra cash on hand are all perks of working part-time. Plus, it allows you to reduce your reliance on your retirement portfolio.

How Edward Jones can help

Each investor has different goals for retirement. But all investors have one retirement goal in common: ensuring their income provides for their needs for as long as they need it. Striking the right balance between your retirement income sources can help provide more stability to your income strategy. Your Edward Jones financial advisor can help you determine the right balance for your unique situation.