One of the thorniest, most complicated issues facing retirees is how much they can take out each year from their retirement portfolio—safely, which means without running out of money somewhere down the road. Why complicated? Nobody knows in advance what the markets will do, and hence the amount the portfolio will grow to (or not) each year and over time.

Nobody knows the inflation rate, future tax rates or (maybe the most important variable) at what age they’re going to die. If you assume you’re going to die next year, then you can safely spend all of your retirement money this year and not worry about living under a bridge at some lonely point in the future. If you break the record and live to 126, then your retirement portfolio might need to stretch a bit.

The most sophisticated research on the topic comes from William Bengen, who published an influential article in 1993 that looked at how much retirees could afford to spend each year, inflation-adjusted, if they had retired in each month since 1926—assuming a 30 year retirement. His initial conclusion over thousands of actual retirement trajectories was that in the worst case, you could live off of 4% of the initial portfolio amount in the first year, adjusted for inflation thereafter, and still have a bit of money left over.

But that 4% figure was a worst case scenario, which befell those unfortunate retirees who left work right at the start of the stagflation period and who experienced the full brunt of the market downturns of the 1970s. (One interesting aspect of the research was that inflation was a bigger threat to retirement portfolio sustainability than bear markets.) In every other time period, people could have been more adventurous with their spending, in some cases up to 10% of that initial portfolio.

Bengen has written a new book that will come out in August, which explains the variables that retirees have to consider, including the aforementioned unknowns, plus the mix of assets in the portfolio, how much of a bequest the retiree wants to leave to heirs, the tax status of the portfolio and the method of the withdrawals. For instance, for a portfolio that includes more asset classes (small cap and international stocks among them) the new worst-case scenario, based on the historical record, now rises to 4.7%.

If all of this sounds a bit mind-boggling, there’s a relatively simple solution. You, or the advisor team, can calculate that initial amount that can be withdrawn based on the currently known situation, and then make adjustments each year depending on how circumstances (the markets, inflation, etc.) have changed. Generally, if the initial withdrawal is based on the worst-case scenario, most retirees will be able to take a ‘raise’ in future years, and as they get older (as the time to death approaches) they achieve more certainty.

Another simple solution is to calculate the amount needed for essentials—food, shelter, gas etc.—and see if Social Security or pensions cover all or most of it. If not, then how much is needed from the portfolio to pay for the remainder? That amount, covering two or three years, can be set aside in cash or short-term bonds, and the retiree knows that no matter what happens in the market, the basics are properly funded for the foreseeable future.

Retirement income planning is undeniably more complicated than accumulating a retirement portfolio during the work years. Bengen’s book, and his research, shows that with careful monitoring, it doesn’t have to be overwhelming.

 

It is Never Time to Panic

With the unprecedented restructuring wave going on across the federal government, unorthodox (to put it mildly) personnel management, appointment of candidates with little or no background in the departments they’re running and a wave of tariffs the like of which the world hasn’t seen since the 1930s, it’s easy to imagine that something might go wrong with the U.S. economy in the fairly near future.  People are calling their financial advisors asking whether they should retreat to the safety of putting their money under the mattress—or, in the extreme, in a house in the woods with krugerrands hidden in the floorboards.

The problem is that nobody knows what the outcome of all this is going to be with anything approaching certainty.  Companies operate, at least nominally, independently of the government, and are only tangentially affected by the chaos in Washington.  The tariffs are going to disrupt delicate supply chains, but manufacturers have had months to figure out how to cope.  The abrupt termination of the USAID program will reduce an important market for farmers, and the retaliatory tariffs from China will reinforce that impact.  But this might lead to more food dumped on the U.S. market at fire sale prices, lowering that aspect of the consumer price index.

The promised firing of tens of thousands of government workers will flood the job market, potentially raising unemployment levels and reducing consumer demand.  But it might also lead to a new pool of qualified executives and staffers for local corporations.

Slashing Medicaid will undoubtedly cause economic pain for tens of millions of Americans, and the conversation about reducing Social Security benefits is hardly likely to reassure seniors.  But those impacts are aimed at people, not companies.

The point here is that every election produces sounds of alarm from the party that was driven out of office, and in the end, the impact on the markets has been minimal.  The sounds of alarm are louder now than in recent memory because the Trump Administration has introduced what might delicately be called ‘uncertainty’ into government policies (meaning nobody knows what they will do next), but the impacts are powerful politically and socially, but perhaps not tremendously so for publicly-traded companies.

That doesn’t mean that there won’t be volatility, as people respond to uncertainty with the usual levels of alarm.  But even if corporate earnings suffer and companies become less valuable as a result of the new policies, it is helpful to remember that the last time there was a crisis (remember Covid?) the government stepped in with a generous stimulus package that put a firm floor under the market, and kicked off a bull market.  This time around, the Trump Administration is talking about creating a sovereign wealth fund—basically a governmental investment portfolio.  If the new president wants to boost a faltering market (and approval ratings), would he hesitate to tell that fund to become a heavy purchaser of stocks at bullish prices?

None of this is a prediction; it is simply an acknowledgment that we don’t know what is coming in the unpredictable roller coaster that is the stock market.  But we didn’t actually know what was coming in each of the last 100 years, so our inability to predict the future market movements is really nothing new.  And there is nothing safe about the mattress when inflation eats away at it.  We panic at our peril.

 

Student Loan Chaos

You can forgive people with student loan debt from feeling confused and somewhat frustrated.  The Department of Education has shut down a key portal, without explanation, that defines the repayment amounts for millions of college-related loans.

After the government ended the Covid-related pause on student debt repayment in October 2023, many people entered into income-based repayment schedules.  In particular, borrowers who qualified for Pay As You Earn (PAYE) plans would have their repayments capped at 10% of their discretionary income.  Others fall under the so-called income-based repayment (IBR) or income-driven (IDR) arrangements, which limit the monthly amount that is required to be paid on student loan debt to 10 percent or 15 percent of the borrower’s income (depending on when the loan was taken out)—making the repayment process more manageable.  Loan balances would be forgiven after 20 or 25 years of timely payments.  

Others are paying under the Income Contingent Repayment (ICR) plan, which caps the monthly payment at the lesser of 20% of discretionary income or what the borrower would pay on a fixed repayment plan over the course of 12 years.

Roughly 8 million borrowers enrolled in the Biden Administration’s Saving on A Valuable Education (SAVE) plan, which based payments on a smaller portion of the borrower’s income, and would have forgiven unpaid amounts under $12,000 after ten years of timely payments.  Moreover, if the borrower makes full monthly payments that do not cover the accrued monthly interest, the government would cover the rest of the interest that accrued that month.  

In each case, borrowers have to file their income information with the U.S. Department of Education, in order to determine the income-adjusted amount of their payment.

They did, at least, until SAVE initiative was temporarily blocked by a court injunction on February18, putting those borrowers into a kind of limbo.  This apparently triggered a decision, still unexplained, to shut down the entire Education Department portal for all income-based repayments, including those that were not challenged in the court case.  Borrowers who are required to annually update the amount they earn are unable to meet the requirement, and failing to do so can cause their monthly payments to rise and interest on their loans to be capitalized into principal.

This comes on the heels of multiple initiatives to forgive some or all of certain borrowers’ student loan debt, each time blocked by the courts.  The constant confusion (Are my loans going to be forgiven or not?  How much will I pay each month going forward?  How do I meet the requirement when the government is making it impossible?) is certainly not what students, college graduates and the parents who took out student debt signed up for.

 

New Budget: What it Means

The House of Representatives has passed its new spending bill, which would slash government outlays pretty much everywhere.  But it left many of the details to be worked out later.

The new budget blueprint would extend the 2017 tax cuts, which were due to expire at the end of the year, and add another $500 billion worth of additional tax freebies, including the exemption of tips from taxable income.  The total cost is estimated to be $4.5 trillion.

The bill would also raise spending on immigration enforcement (estimated cost: $110 billion), on customs and border inspection (up to $90 billion) and put additional money aside to pay the military to engage in border security (up to $100 million).  

The bill requires individual legislation that removes at least $880 billion from somewhere in the Energy & Commerce-related part of the government’s budget, which includes Medicare and Medicaid payments.  Some of those savings might come from a work requirement for Medicaid recipients who don’t have provable disabilities or young children, and some would come from additional paperwork required to stay enrolled (causing some recipients to get discouraged and stop filing for benefits).  

Other cuts include at least $330 billion from school nutrition programs for children of low-income families and ending many of the provisions of the student loan repayment plans.  The bill proposes deep cuts to the Supplemental Nutrition Assistance Program (SNAP)—the former food stamps program—and $562 billion in unspecified cuts that would have to be worked out later.

Interestingly, those tax cuts might be reversed; the bill mandates that if the House fails to find $2 trillion in deficit reduction somewhere in these unspecified goals, then taxes would be raised by a commensurate amount to offset the difference.  This bill could wind up creating tax increases.

But assuming all goes as planned, lowering taxes would cost the government $4.5 trillion in revenues, and all those cuts would purportedly save $2 trillion.  The estimated impact on the government deficit is not promising; over the next ten years, the bill, as written today, would add $2.5-$2.8 trillion to the deficit side of the ledger.  Now the legislation goes to the Senate.

 

Download a PDF version of this article below.