A model story from practice.This story brings together several situations we deal with repeatedly. It is not about one particular client.
She brought a printed table and put it on the desk facing us. She had been keeping it for seven years. A column with the value of her investments, a column with the expected return, and a column with what would be left when she turned eighty.
She was in her early fifties, with a successful career behind her and wealth in the range of ten to twenty million crowns. In about three years she wanted to cut back on work significantly.
Until then her investing had a fairly simple goal: to create capital and grow it over the long term. Now, for the first time, she expected something else from it. It was to start providing her with a regular income.
Her table made sense. But it had one important weakness: it assumed the same average return every year.
Markets do not behave that way. Two similar long-term average returns can lead to very different outcomes depending on the order in which the good and the weaker years arrive. And the moment you start withdrawing regularly, that order starts to matter.
And it was not only the table on the desk. She had two older savings contracts, employee shares that had grown over the years into a significant part of her wealth, and a flat inherited from her parents.
So in the end the question was not only: how much can I withdraw each month?
We needed to work out how her whole estate should function once employment was no longer the main source of income.
When the role of the portfolio changes
First we needed to know what regular income she expected from her wealth. How much she wants available regardless of the current market situation. Which part of the capital can keep working with a long horizon. And how much fluctuation she can accept once she no longer has the same income from work.
The investment horizon does not end when work does. For someone around fifty, part of the capital may stay invested for another thirty years or more.
The portfolio therefore had to manage two things at once: provide money along the way and keep its long-term growth potential.
One company made up a third of the investment assets
Looking at the portfolio, we came across one more substantial thing.
About a third of the investment assets consisted of shares in the company she had worked for over many years. Originally a smaller position, it had grown considerably.
She knew the company well and trusted it. Seen across the whole estate, though, this created a high concentration. Her salary, her career and a significant part of her investment capital were all tied to the same company.
So we prepared a plan to reduce the position gradually and started moving the money into a broader portfolio. We set the pace in advance, so that the decisions would not depend on each quarterly result or on a short-term move in the share price.
How much a portfolio can pay out over the long term
Only once the structure of the portfolio had been adjusted could we start modelling future withdrawals.
We worked with different market scenarios, with the expected length of drawing and with the possibility that a weaker period arrives in the first years.
So the client did not receive one number meant to hold for the next thirty years regardless of circumstances. She got a sense of a sustainable level of withdrawals and, with it, rules for adjusting that level in the future.
An income from investment assets is not an amount fixed once and for all. It has to allow for how the portfolio develops, how long the capital has to last and how the client’s own situation changes.
A portfolio is prepared for an income before the first withdrawal
The three years until she planned to cut back gave us room to change the portfolio gradually.
The part of the capital that the regular withdrawals will come from needs a different level of liquidity and risk from money that can stay invested for another ten, twenty or thirty years.
That is why it makes sense to start thinking about an income while a person is still working and needs no money from the portfolio at all.
It is not only a question of how much I will be able to withdraw one day. It matters just as much where the money will come from and what happens to the rest of the capital.
What we did not change simply because it was old
The client had two older savings contracts. Before deciding what to do with them, we asked for the complete documentation, including the amendments.
One of them no longer made sense in the new strategy. The other had guaranteed terms that were still attractive, so it stayed in the portfolio.
We did not judge the older investments by their age, but by the role they can play in the new strategy.
How it looks today
About a year and a half remains until she plans to cut back. The share of employee stock is being reduced according to the plan set in advance, and the portfolio is moving towards a structure it will be possible to draw from regularly.
Once a year we update the assumptions together and check whether the expected level of withdrawals, the investment horizon or the client’s situation has changed.
She still has her original table.
She just no longer looks in it for one number to tell her what happens in thirty years. Next to it she has an investment strategy that allows for the market, the portfolio and her own life all changing over those thirty years.
What to take from this if the drawing phase is approaching
- It makes sense to think about an income several years before the first withdrawal. That way the portfolio can be adjusted gradually.
- An average expected return is not enough on its own. The order of the good and the weaker years matters too, especially at the start of drawing.
- Leaving work does not end the investment horizon. Part of the wealth can stay invested for several more decades.
- Before regular withdrawals begin it is important to check the concentration of risk. In this case a third of the investment assets was shares in a single employer.
- An income does not have to be one fixed number. Its level can be adjusted over time to how the portfolio actually develops and to the client’s situation.
- If part of your future may be in another country, the currency you will draw the money in belongs in the calculation too.
