By John Grace
Contributing Columnist
Imagine this: you’ve worked hard, sold two successful businesses, and netted $5 million after taxes. You’re set, right?
With the 4% withdrawal strategy, you’ve planned to take $200,000 a year to fund your lifestyle. You can picture it now — vacations, fine dining, living your best life.
But then, out of nowhere, a market downturn hits. The bull run is over. Your $5 million investment portfolio suffers a significant loss, resulting in a 50% decline (similar to 2002 and 2008).
Suddenly, you’re left with only $2.5 million. The financial security you once had has vanished. You’re now faced with a decision: adjust your lifestyle or fight to get back to your previous financial position.
Here’s the challenge: you need to recover that 50% loss to be able to live the same $200,000 lifestyle you once enjoyed. Let’s break down the math, step-by-step, and understand how you can navigate these tricky waters to plan your future.
When the market takes a hit and your $5 million portfolio shrinks by 50%, you’re left with just $2.5 million. If you were following the 4% withdrawal rule, your annual income was set at $200,000. However, with only $2.5 million remaining, taking out the same 4% now gives you only $100,000 per year. That’s a $100,000 drop in your lifestyle.
In response to this dramatic loss, you decide to scale back your spending. You need to lower your income to match the 4% withdrawal rule based on your current $2.5 million. That means your new target income is $100,000 a year, which may feel like poverty to you.
By adjusting your withdrawal target, you are now living off half of what you were before, but the goal is clear: You need to recover your $5 million to get back to living the $200,000 lifestyle.
To recover from a 50% loss and return to $5 million, you need to grow your remaining $2.5 million. But how much do you need to earn to get back to your original financial position? You’re starting with $2.5 million and aim to return to $5 million. The math is straightforward:
To recover your full $5 million, you need to achieve a 100% return on your remaining $2.5 million. That means doubling your money at the same time you’re taking income. Looks like a Hail Mary pass is necessary.
A 100% return is no small feat, and it’s certainly not guaranteed. However, there are a few strategies you could consider to help achieve this goal.
• High-risk investments: Stocks, particularly in growth sectors such as technology or emerging markets, can potentially yield high returns. However, they come with increased risk, and the possibility of further losses exists.
• Real estate: Some investors achieve success in real estate, whether through flipping properties, generating rental income or pursuing commercial ventures. Real estate can provide a steady stream of revenue, but along with assuming annual increases in value and rents, it requires expertise and management.
• Alternative investments: Other options, such as commodities or hedge funds, can deliver high returns but are often volatile and unpredictable.
In the world of investing and wealth building, the focus is often placed on maximizing gains. However, one of the most powerful strategies for preserving your financial security is not just about making money — it’s about limiting your losses.
Limiting your losses in advance is a proactive approach that can save you from the devastating effects of unexpected market downturns, economic shifts or personal financial setbacks. Think bull or bear, we don’t care.
John Grace is a registered representative with LPL Financial. His On the Money column runs monthly in The Wave. The opinions expressed here are for general information only and are not intended to provide specific advice or recommendations for any individual.
LIFTOUT
In the world of investing and wealth building, the focus is often placed on maximizing gains.
