Credit: An article in Financial Planning magazine, "Calculating an Advisor's Value," details the components of planning decisions that help you pinpoint the value of your financial advisor.
Financial research firm Morningstar says planners potentially add the equivalent of 1.82% annual return to clients through these five components. The third of the five, "Dynamic Withdrawals," enables advisors to bring an additional 0.54% to their clients, Morningstar says.
Dynamic Withdrawals determine how much, as a retiree, you can withdraw your account without running out - 4% of assets is the longtime standard rate. But the article warns: "Morningstar itself has said that, because of low bond yields, the old 4% rule has become a 3% rule. That means for every $100,000 in a portfolio, it considers the new safe spend rate to be $3,000 annually, increasing with inflation."
A safe-spend rate also hinges on the right asset allocation, achieving tax efficiency and incorporating flexibility - and anticipation - in spending during market ups and downs.
In the 1990s, advisor Bill Bengen proposed that retirees can annually withdraw 4% of their portfolio beginning at age 65, increase the dollar amount by inflation and not run out of money before they die. Responding to this 4% rule , other advisors' recommended withdrawals swing from as little as 2% to as much as 6%. Still others see the 4% rule as outdated .
Studies associated with the 4% rule help little when you hit age 78 and your advisor fails to calculate your safe withdrawal rate. Chances are also good you misunderstand "safe," which in financial planning generally means an 80% or higher chance of success.
You want and need a 100% chance of not running out of money in retirement. Having enough money in 10 years depends on growing a portfolio enough to overcome inflation. Having that much growth means a portfolio of volatile holdings, typically stocks, where a fall in value jeopardizes your retirement.
Each age and withdrawal rate has a right asset allocation that gives you the best chance of success - and success in this case means maintaining your standard of living in retirement. Your total wealth management depends partially on stable investments (fixed income) to cover the next five to seven years of safe spending rates.
Returning to the idea that a smart advisor adds 0.54% of value, assume your stock investments average 11% (6.5% over inflation and 4.5% inflation) and you withdraw at a 4.5% rate; dynamic withdrawals might boost returns by 0.495% over the entire portfolio. Withdrawing from the equity of your portfolio when it is down costs dearly in retirement.
After studying systematic withdrawal rate, I created safe initial withdrawal rates for every age from 0 to 100, assuming your portfolio earns an average 3% over inflation. "On average" means a 50% chance of success, but because the age is high and the growth conservative, these withdrawal rates give retirees a better than 80% chance of adjusting their initial withdrawal rate up by inflation each year.
Because projections are conservative and stocks earn an average of about 6.5% over inflation, if markets fall retirees keep their spending constant, forego that year's inflation increase and wait for the markets to rebound.
Our safe withdrawal rate for age 65 is 4.36%, for example.
Safe rates depend heavily on age and involve risk. If you put your entire portfolio in gold - or, even worse, cash - you will likely not achieve an average return to support withdrawal rates appropriate to your age. Being too safe jeopardizes your standard of living in retirement.
Dynamic withdrawals add 0.54% to client portfolios. A plan to not run out of money is priceless.
(I address other components of calculating an advisor's value on myblog.)
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David John Marotta, CFP, AIF, is president of Marotta Wealth Management Inc. of Charlottesville, Va., providing fee-only financial planning and wealth management at www.emarotta.com and blogging atwww.marottaonmoney.com.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
