With a $25 million net worth, I’m worried my 3% withdrawal rate is too low — should I adjust it?

It’s normal to confront several questions about constructing a retirement portfolio and deciding how much you need to withdraw. No matter how large your portfolio becomes, you’ll want to make it larger.

That brings us to a Reddit post from a user with a $25 million portfolio. The user uses a 3% withdrawal rate but wants clarification on the withdrawal percentage and how to diversify their holdings. The user believes it is risky to have less than 90% of your portfolio invested in equities due to inflation.

I will share my opinion in this post, but it is always good to work with a qualified financial advisor who can offer personalized advice.

Is a 3% Withdrawal Rate Too Low?

The optimal withdrawal rate factors in your living costs, financial goals, and other details. A 3% withdrawal rate may not be enough to cover living expenses if you have a $100,000 retirement account. Building it up should be a priority in that scenario.

However, the Redditor with a 3% withdrawal rate also has a $25 million portfolio. This withdrawal rate adds up to $750,000 per year. That’s enough for most people to live on, and the Redditor isn’t asking about how to juggle their living expenses.

Stocks can reclaim that 3% return quite easily in bull markets. Even bonds and CDs can generate returns above 3.00% APY. 

Is 100% Equities the Right Move

The Redditor’s question centers around whether they should invest 100% into equities or diversify their holdings. While equities allow people to grow their wealth faster than fixed-income assets, the main objective for high-net-worth individuals is to stay rich.

With a $25 million portfolio, it’s not necessary to take big risks. Sure, it would be nice to go from a $25 million portfolioto a $50 million portfolio. However, pursuing that route risks the portfolio going down to $5 million, and it’s not worth it. 

As a portfolio gets larger, every extra dollar has less of an impact on a person’s life. Wealth preservation becomes the main objective, and that’s when fixed income can help.

Fixed income has less upside than stocks, but still presents stable upside. Allocating some money into fixed income over time can reduce your portfolio’s volatility during stock market corrections. Many investors put more capital into fixed-income assets as they get older.

Taxes on Fixed Income Can Reduce Your Purchasing Power

However, fixed-income assets aren’t as good as they seem, especially for high-net-worth individuals. These assets barely stay above inflation with their posted rates, but your take-home money may fall below the rate of inflation.

The individual who withdrawals $750,000 per year will be in the highest tax bracket, assuming it’s all taxable like a traditional 401(k) plan. That means all of the interest earned from fixed-income assets will be taxed at 37% on the federal level, regardless of whether the Redditor is single or married.

A 37% tax rate takes a 4.00% APY down to 2.52% APY in real returns. This rate does not include state taxes, which will also reduce the total return. 

Even without state taxes, the 2.52% APY in return returns underperforms the average inflation rate of 3.8% per year. This average rate is based on annual inflation rates from 1960 to 2023.

Your Age Plays a Role

Older investors tend not to think as much about beating inflation. They prefer to match it while ensuring that their wealth remains intact. However, younger investors with more money in their portfolios may want to stay in the stock market longer.

It’s still possible to grow wealth over time and pass on a bigger nest egg to your heirs. If you don’t have any heirs behind you, it makes more sense for high-net-worth individuals to take a conservative approach with their portfolios.

It’s important to assess your financial goals and risk tolerance before making any adjustments to your portfolio. Fixed income offers more stability, while equities can generate higher returns. 

Illiquid assets like real estate can also help, but it’s good to consider if you want the extra work in exchange. Some illiquid assets provide advantages that you can’t get with stocks. Knowing more about your financial goals and which assets you feel confident with can lead to better decision-making.