Learn a Great Way to Increase Your Retirement Paycheck.
Welcome everyone to another edition of the Highball Advisors, Railroad Retirement Whiteboard. My name is John McNamara of Highball Advisors. Today we're going to talk about retirement spending, specifically, drawing down that nest egg to create a nice retirement paycheck. You've saved up in your 401k, you have this bundle of money, hopefully, and now you got to learn how to spend it down and keep it, right? That nest egg, and you need to keep it because you don't know what your expiration date is, so you're going to need it for a long time. So, I came across this study and I thought this was very interesting on the effects of diversification and how much you can actually withdraw the money, what percent of the money you can withdraw. So what am I talking about when I talk about spending?
So when I talk about spending, I'm really talking about safe withdrawal rates. That basically means how much money can I take out without exhausting the money. It's based off a 30 year withdrawal period. So figure, a railroader maybe he retires at 60, looking to get to 90, there's 30 years, but you always want to base everything off 30 years. So, maybe some of you heard the 4% rule. Basically what that is, is over any 30 year periods, I think stretching back to the 1800's, at no time did your portfolio fail, if you just withdrew 4% at a time, depending upon how it's invested, of course. Right? If it's just in cash, if you just had it underneath the mattress, obviously, it would run out of money in 25 years. $40,000 times 25.
So that would run out in 25 years, so you want to make the 30 years. So, you have things to worry about. You have inflation, obviously, so you've got to make this money last. And the way they did this study is they talked about diversification, and they looked at basically a 60-40 portfolio, 60% stocks, 40% bonds. And in Portfolio 1, 40% bonds, like I said, and in 60% it was in large cap stocks. So think of like, the S&P 500, you just have it in S&P 500 bond. And basically looking at any 30 year period, you could take out 4.2%. That would be your withdrawal rate. And then obviously, you would have ups and downs.
However, as you keep diversifying, so if you did 50% Large Caps and 10% International, oh boy, now you're up to 4.4%. So now we're generating a little bit better retirement paycheck. So, as you keep going down through this exercise, they kept diversifying, diversifying, diversifying down to the final one where it's 40% bonds. And then look how they split it up, 10% Large Caps, 10% International, 10% Small Caps, 10% Micro Caps, 10% Mid-Caps and 10% like a total stock and nice return. And that increased it all the way out to 5% by just doing that diversification strategy. It's kind of that whole theory, spread your bets out across the table, so to speak, as I like to say. Because you don't want any single point of failure and that's what diversification gives you? Somebody's up, somebody down, we're not placing it all...
Now, remember it's important with diversification that, see how these are all different asset classes, so owning, let's say, Ford, GM and Mercedes, that's not diversification, you're all into the auto sector. So really, that diversification is very, very important. And if you follow this strategy, historically, it tells you that you can increase your retirement paycheck. So, I hope this is some food for thought for you, as you plan to draw down your nest egg in retirement, through diversification, very, very important stuff. So please subscribe to my YouTube channel, reach out to me if you have questions about this. I have a Boarding for Railroad Timer Process. We look at things like this, how to stretch out that retirement paycheck, because it's important. You pair that with your railroad retirement annuity, very, very powerful.
So, as I said, subscribe to the YouTube channel, click on the notifications, share this video with other people, especially those getting close to retirement saying, what can I do with this money to make it last for myself and my family? This is the way to do it. And until next time, everyone, please stay safe, stay on track and take care so long everybody. Bye.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. Highball Advisors encourages you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Highball Advisors, and all rights are reserved.from Highball Advisors, and all rights are reserved.