Rarely do clients enter the office saying, 鈥淲e need to make more money.鈥� More often it鈥檚, 鈥淗elp us make sure we don鈥檛 run out of money.鈥� Perhaps this is because the majority of my clients are retirees, or perhaps it is because people are naturally more risk adverse when they have recently experienced a market downturn.

Ensuring a client doesn鈥檛 run out of money would be simple 鈥� if 鈥� we knew the following variables:

Starting value of assets;

Exact yearly return on the portfolio over the lifetime;

Exact drawdown need; and,

Exact date of death of the client.

The first measure is easy to obtain. The other three are much more difficult. Draw down too much and you run out of money. Draw down too little and you may deny yourself income for no reason.

Most financial planning software uses a fixed number for rate of return and a fixed drawdown amount. In reality, even 鈥渟table鈥� assets cash and GICs have provided fluctuating returns over the last 30 years, ranging from 18% to 3%. Mr. S. Market also provides random returns on a year by year basis, ranging from -30% to +60%. Random returns are less of an issue for those still building on their savings, but can seriously affect a client who is withdrawing from their savings.

While planning software is a useful long range tool, it doesn鈥檛 resolve the year-by-year changes in variables.

I am often asked, is there a withdraw rate (drawdown) that can survive all time periods?

Much research has been done by pension firms and discussed by tenured advisors who have working experience on this subject.

While there are no precise conclusions, back testing of the typical 鈥渂alanced鈥� portfolio, containing high quality government bonds and major equities from Canada and around the world, suggests that approximately a 4% drawdown rate is sustainable.

In other words, if you want your capital to be there 20 to 30 years later, this is what you would take on a year by year basis, unless you are currently a GIC investor with current rates below 4%.

My concern lies with fact that the industry has marketed to clients a much less realistic expectation. Mutual funds with 8% pay rates were created years ago and the popularity of income trusts through 2006 with 7-15% distribution yields demonstrates that certain market participants are trying to get the attention of investors by posting yields that may be not sustainable 鈥� often leading to the disappointment of investors.

There are a number of portfolio management techniques that can help clients who wish to maximize their income and ensure sufficient capital for later in life and most importantly provide peace of mind in those abhorrent yet inevitable negative return years to come.

Lara Austin is an Investment Adviser at the Courtenay office of RBC Dominion Securities (Member鈥揅anadian Investor Protection Fund).