Of course, investment returns are not consistent, so the average total return we used of 9% would vary widely from year-to-year. Plus, the demands you make of the portfolio (your expenses) may also vary from year to year. How do we manage all of these variables? Through your financial planning.
At Vista, we start with historical total returns, adjust them to be more conservative (because we don’t want anyone running out of money), and then apply those adjusted returns to your long-term financial plan. We also test the outcomes by increasing your inflating expenses at two rates: 2% and 3%. Running these calculations gives us an idea of how you’ll do given your spending when compared to the total return of your investments. We can assist with making adjustments along way as the investment markets change, or as your goals change.
One of the situations we want to be sure to include is the “perfect storm” of low returns and high expenses that may occur at some time in your plan. Sometimes when the investment markets are dropping, it’s a good idea to minimize withdrawals from your investment portfolio. Doing this ensures that there is enough left in your portfolio to grow and fulfill your goals when the markets eventually come back.
All of this requires a dialogue with you. You may have often heard us ask “How much cash do you have?” or “Do you think that you have enough in your bank right now?” Many times, those are just the opening questions to help us determine how you’re doing compared to your plan and what we may need to do to update it.