Five Ways to Extend the Life Expectancy of Your Portfolio

Five Ways to Extend the Life Expectancy of Your Portfolio

Not everyone needs to withdraw money from their portfolios right now, but for many, it will happen sooner or later. 

With uncertainties high and appetites for risk as low as government bond yields, it’s more important than ever to stretch your portfolio dollar longevity.  Becoming a miser and living in fear isn’t the outcome that most of our clients want to pursue to avoid running out of money.   

Instead, consider these five keys to thinking about your portfolio that involve being a bit creative and adapting your strategy to the circumstances.  If done correctly, the hope is you can live life more fully, and make your money last longer, regardless of the economic environment. 

1)      Withdraw less from your portfolio when you have negative returns.  This can range from simply not increasing your withdrawal for inflation after a negative year to reducing spending by 10% after a severe bear market (like 2008).  While not pleasant, these adjustments are not materially life changing and can provide more future security, leaving room to increase withdrawals when the economic environment improves. 

2)      Sell bonds, not stocks to fund withdrawals when stocks are down.  By following this strategy, your portfolio’s risk profile increases slightly during a down period, but it helps avoid the permanent damage caused by selling equities when they are low. 

3)      Bank profits in good times.  When investments exceed their target allocations due to appreciation, take gains and place in cash; then use this cash to fund future withdrawals.  This builds a war chest to fund your needs during bad times.  

4)      Bet on the probable – not the possible.  Position your portfolio on the highest probability event and stay away from trying to pick either extreme.  Portfolios designed with extreme events in mind can dramatically impact your ability to live fully if your thinking or timing is wrong.  Avoid making big changes based on fear, greed, or what everyone else is doing.  Rather, make adjustments centered on empirical evidence. 

5)      Broad global diversification, while boring, is still the crown jewel of making your money last.  Having meaningful exposures to asset classes that don’t correlate well to one another helps smooth portfolio returns, in both expansionary and recessionary periods.  It also reduces the risk that you’ll make an emotional decision amidst a severe downdraft that could sabotage your long term returns.   

These strategies allow you to focus on things you can control and should let you concentrate on your life rather than the economy.  By making minor adjustments along the way, you ought to be able to withdraw more over your lifetime than if you have a static plan.   

Guyton and Klinger, pioneers in the study of sustainable withdrawal rates, illustrated this concept (and some of the strategies listed above) in their Journal of Financial Planning paper titled “Decision Rules and Maximum Initial Withdrawal Rates.” 

Ben Johnson
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