How to Grow Your Aging Parent's Wealth
Principle #2: A successful retirement requires a bullish outlook and a large dose of discipline.
A common misconception during retirement is that as your elderly parents withdraw their money, their overall wealth must decline as well. This is false. While the strategies and techniques go beyond the scope of this article, the key element to succeeding in this regard is to accept the fact that the stock market and its abundant potential is your ally, provided it's mixed with a healthy dose of discipline. Consider the table below:
|
30-Year Retirement
Stock/Bond Mix |
|
100/0 |
80/20 |
60/40 |
40/60 |
20/80 |
| Retirement Withdrawal Rate |
Retirement Success Rate (%) |
| 4% |
83 |
86 |
89 |
91 |
92 |
| 6% |
50 |
49 |
42 |
29 |
10 |
| 8% |
24 |
18 |
10 |
2 |
0 |
*(1) Source: T. Rowe Price.
As shown in the table, over a 30-year retirement, the maximum percentage your elderly mom or dad can withdraw from a $1 million portfolio and still have at least an 80% chance that they will have any money remaining at their death is a paltry four percent. Further, as your senior parents withdrawal rate increases ever-so-slightly above four percent so, too, does the chance of them outliving their money. Remember my friend's father who, upon retirement, moved all of his money into bonds because they were "safe?" Suppose for a moment that upon retirement he instead chose to allocate 20% to stocks while withdrawing at the slightly increased rate of six percent rate over the next 30 years. His likelihood of failure—running out of money before he ran out of life—combined with a less than bullish outlook, and just a two percent increase in his withdrawal rate, results in a staggering 90% (ten percent success rate) failure rate! What's "safe" about that?
An allocation to stocks and other growth vehicles is a critical component to your aging parent's portfolio's ability to sustain itself. Moreover, it requires a bullish, even optimistic, outlook. Blindly believing that your elderly mom or dad's portfolio will permanently and irreversibly decline in value while they withdraw from it is a legendary fable. Worse, however, is a disregard for a disciplined withdrawal strategy. A seemingly trivial one to two percent difference in that withdrawal rate due to a lack of discipline, is a steep price to pay for what could likely result in a bankrupt investment portfolio. Of course, all of this is predicated on the assumption that your aging parents will live a normal life expectancy. Should they die prematurely or need much less than what a four percent rate of withdrawal will sustain, their situation could vary significantly.
The time-tested truth to believing, and better yet, accepting that growth and the stock markets, combined with a healthy dose of discipline are your allies over time, not your enemies, is a fundamental key to growing your elderly parents' wealth.
*(1) Source: T. Rowe Price. Assumes an investor moves from a 60%/40% to 20%/80% stock and bond allocation, respectively, a 30 year retirement, and withdrawal rate of six percent inflation adjusted annually.