In a previous post we showed strategies for understanding the appropriate target annual income number or goal. The purpose of going through these processes is to provide a solid foundation for assessing the amount of investment capital needs to be in a portfolio in order to have a sustainable life without income from employment or actively owned and managed business interests. Too often people preparing for this financial independent stage of their lives underestimate the amount of money they need and/or over estimate the rate of return on investment in their calculations. One of the great uncertainties of long term financial independence is the length of time necessary to sustain a lifestyle. Life expectancies continue to rise significantly. In the 80’s retirement expectations were for 10-20 years. Now life expectancies increase this need for adequate planning 20-40 years.

Too often little attention is paid to the likely event of significant differences in the actual rate of returns realized over the years. In the late 70’s and early 80’s it was possible to have bank CD’s in excess of 10% annual returns. Unfortunately many assumed they would see these rates forever. Imagine the lifestyle changes necessary for a 60-80% reduction of income due to the lower interest rates that ultimately came back to normal. More on this later.

If you have gone through the steps in the previous post and have “your number” it will be important to take a couple more steps. First, identify any ongoing sources of income such as Social Security and Pensions from employers if you qualify. These can be found on the Social Security statements sent to you by the Social Security Administration and the employers who sponsor your pension if available. Do not try and calculate income from investments yet as we will show an alternative approach later.

Sustainable Lifestyle Number

Minus Social Security and Pensions

Equals “Net Burn Rate”

Divided by 1 minus Income Tax Rate (1-.3=.7)

Equals Before Tax Burn Rate.

The “net burn rate” is the amount of income your investment portfolio needs to deliver, adjusted for inflation, for you to be able to maintain your lifestyle comfortably. Sophisticated Wealth Managers use specialty tools to assess the adequacy of an investment portfolio accounting for multiple income streams, long-term investment returns and measuring variability using high end tools such as Monte Carlo simulations to gauge the probability of success. The best wealth managers will endeavor to use realistic assumptions in these analyses as small variations can skew the results greatly. Careful questioning of how conservative the assumptions used by an advisor are always appropriate. Our next post on this topic will explore other methodologies to assess this work.

The foregoing content reflects the opinions of White Oaks Wealth Advisors and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.

Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.