Total Returns are Between You and Your Heirs

Be Thrifty and Leave a Lot

Thinking about those two components of Total Return, what happens if you’re living off your portfolio and you just spend the income, or yield? Let’s say you have an investment of $1 million in a diversified portfolio that is 60% stocks and 40% bonds. Applying the 3% yield that we mentioned, that portfolio would generate $30,000 per year to help support your lifestyle and that amount would increase as the portfolio grows.

If we follow this through for 20 years, you would receive about $1.1 million in total income over the years from this portfolio. Meanwhile, the principal would grow to about $3.2 million, almost three times what you received. If you goal is to leave your heirs with a lot more money than you had, this would be a good plan for you. This scenario is illustrated on the following charts as “Spend Income Only”.

Be Spendy and Leave Some

What if that wasn’t your goal, though? What if your goal was to leave your heirs $1 million? How much could you spend then? Then you would take all of the Total Return, both the yield and appreciation, averaging $90,000 per year, or $1.8 million over the 20 year period. Compare that with the $1.1 million in the prior example. Also think about the difference between living off of the $30,000 of income versus the $90,000 of income and appreciation. That could make a huge difference in your lifestyle every year. This scenario is illustrated on the charts as “Spend All Income and Growth”.

Those two extremes are fairly simple. We could bring in more variables, or apply different distribution rates. We’ll give you one more example that is a little more realistic and focuses on the “Total Return” approach. Let’s say you wanted to leave $1 million to your heirs, after accounting for inflation. If we assume a 2.5% inflation rate, then in 20 years you would need to leave $1,639,000 to equal today’s purchasing power of $1 million. Your average distribution would be about $83,000 per year during the 20 year period (it, too, would increase each year and $83,000 is the average of what you would receive each year). This scenario is illustrated on the charts as “Spend All Income and Some Growth”.


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Total Portfolio Returns and Your Plans

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