What Are Your Investments Really Worth?

I don’t think that most people know what their investments are really worth.

If your portfolio was created for the purpose of providing future retirement income, for instance (as it is with most international school teachers) then its value has to reflect that.  Let me explain.

Studies show that if Joe Algebra owns a portfolio worth $100,000 upon retirement, then he can only withdraw 4% of that portfolio each year (or $4000) to ensure a reasonable likelihood that he won’t run out of money.

That’s the true value of Joe’s portfolio:  $4000 a year, indexed to inflation.

Over time, Joe Algebra would give himself small raises to cover inflation (perhaps a 3% raise each year).  And if his portfolio gained 7% annually, Joe could provide himself with an indefinite, adjustable “salary” of $4000 per year to assist him with the cost of living.  If he could survive on a retirement income of $4000 a year (plus whatever additional—and hopefully huge!– benefits he receives) then he’s likely going to be set.

The difference between “enough money for forever” and enough money to die broke, on some kind of schedule, isn’t as much as you might think it is.

As William Bernstein notes, in The Four Pillars of Investing, if somebody wanted income of $40,000 a year (derived from their investments) then they’d need a portfolio of $1 million.  This should allow them to sell $40,000 worth of their investments each year, give themselves raises to cover inflation, and never run out of money.

But if somebody scheduled to die on some kind of 35 year schedule, while withdrawing $40,000 per year (indexed to inflation, as above) then how much money would they need?  Based on Bernstein’s studies, they would need $746,585.

There’s not much difference between $746,585 and $1 million.  So it doesn’t make much sense to schedule your retirement payouts so that you run out of money after a set number of years.  If you miscalculate slightly, you could run out of money before you die.  Rather, if you withdraw 4% per year, you can likely sustain that payout forever, even after you’re gone.  You could consider creating a philanthropic trust, or bequeathing it to your children.

Let’s have a look at Harry’s account.  I wrote about his indexed account in my post yesterday, but now we’re going to look at it with a different lens.

Yearly Performance
Year Market Value Net Invested ROR
2008 $255,528.62 $288,651.99 -12.5%
2009 $271,793.49 $268,651.99 15.52%
2010 $283,564.94 $256,933.35 8.91%
2011 (YTD) $272,314.29 $238,833.35 2.40%

You can see that he deposited $288,651.99 in August, 2008.  He has taken nearly $50,000 out of the account since then.  Now here are some questions for you to answer (hopefully in the comment section of this post)

1.  Is Harry’s withdraw rate sustainable?  Why or why not?

2.  What is Harry’s current portfolio really worth, as annual income?

3.  What is your portfolio really worth, as annual income today?

4.  Are you on track?

5.  If not, what plans do you have to get on track?


Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School and Millionaire Expat: How To Build Wealth Living Overseas. My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions.

You may also like...

6 Responses

  1. My online friend, Passive Income Earner has the right idea. To him, his portfolio is worth as much as the dividends it throws off in cash. This is a more conservative estimation of the cash flow potential of his account, because his analysis involves an assessment of the dividends only, and not the portfolio's cash flow potential, based on selling 4% of his assets each year, upon retirement.

    He continually updates his passive income (dividend income) which I think is fabulous. Remember: Your account is only really worth as much as its cash flow value. The same goes for any real estate you might own.

    Check his blog out here: http://www.thepassiveincomeearner.com/dividend-in

  2. DIY Investor says:

    I use the 4% rule with my clients but spend some time talking about the importance of the sequence of returns and the fact that it's more difficult than it appears to assess your desired spending in retirement.

  3. DIY Investor says:

    FYI: I'm sure you know. Your book is listed on Amazon for pre-order.

  4. Paula @ AffordAnythi says:

    I agree with Andrew — your investments are only worth as much as they cash flow each year, AFTER you've reinvested for inflation. I own a rental property. I peg the leases to an annual inflationary increase. After mortgage, taxes, insurance, etc., I cash flow $300 a month. That's how much the property is worth.

  5. Jason says:


    I’m a 36 year old hardcore couch potato! When I’m ready to hang up the international teaching life style (no US SS), what’s your opinion on shifting my portfolio to a Vanguard Managed Payout Fund vs managing it myself with a 60%-40% spilt and following the 4% rule?



  6. Barry says:

    Can you not live off the dividends instead?

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.