Solutions 4 Financial Independence: 9/13/18

Published: Sep. 13, 2018 at 12:18 PM EDT
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Question: I've had high gains in my portfolio. Would this be the appropriate time to increase my monthly income?

Answer: "Well Mary Lou, it's really going to depend on the theory you're using in order to take income distributions. A common theory that's used in the financial industry is that you use a percentage of the total principle you have. As an example, if you have $500,000 and you were to take four percent of that in income, that means that you would take $20,000 out a year.

The theory is that at a four percent distribution, you have room for hopefully some growth and as you get growth then you're going to increase the amount of principle you have. As you increase the principle, hopefully you'll be able to be allowed to take out more income. So as an example, if you go from $500,000 to $600,000, your income, based on the four percent, should hopefully go from $20,000 up to $24,000. So that's the theory that as you gain in principle, you can take a little more out in income. Now I will say, you've got to be cautious. The reason why is because markets don't only go up, but they also go down. And so if you move up too quickly, and then all of a sudden your principle goes backwards, you could jeopardize running out of money.

Our firm, if we use that theory, we don't usually take that money the very first year you make gains. We want to build you up a little bit of cushion so that down the road if we do have some market losses or we do have some drags in the market where we're not earning whatever we're taking out, then we're not eroding that principle.

Because Mary Lou, the worst thing you could do, and every retiree tells me this, is if I run out of money, how do I live? And so the last thing we want is to take too much money to where you can't comfortably live and maintain your standard of living down the road."