How Large A Slice Is ESOP In Your Retirement Pie

Updated: Oct 31

People commonly ask how much income can they generate from their assets. And as an employee-owner your ESOP plan could make up a large segment of your resources come retirement.


When you enter retirement you will no longer have a standard paycheck to depend on. You’ll need to create income from your investments plus social security, annuities, and a pension if you are lucky to have one.

Retirement income is money you withdraw monthly from your investments, or nest egg, over the next several decades to fund your lifestyle.
Pumpkin pie on a blue backgroun with hands taking slices. Representing your investments and income sources in retirement.
How large a slice is ESOP in your retirement pie?

Retirement income is money you withdraw monthly from your investments, or nest egg, over the next several decades to fund your lifestyle.


This lifestyle requires a balance between paying for the needs of today with funding your goals for the future. If you do not achieve this balance, you risk outliving your money.


One of the simplest ways to strike this balance is to set your annual retirement income based on the 4% rule. This strategy allows you to draw 4% of your investments annually while the rest of your investments continue to compound. It's relatively simple to estimate. Begin by adding up all of your investments. Then, identify 4% of this amount. This is what you can use to fund the first year of retirement.


In subsequent years, if your investments are doing well, you might increase the dollar amount you withdraw to account for inflation. If your investments perform poorly, you might reduce your withdrawals for a period of time lowering your withdrawal rate from 4% to perhaps 3% until markets recover. By following this formula, you should have a reasonable chance of not outliving your money during a 30-year retirement. The 4% withdrawal rate is not guaranteed to prevent you from running out of money, it is a guideline, and investments may lose value.


An Example of the 4% Rule

Here is an example of the amount of retirement income an ESOP, 401k and IRA could generate with the breakdown of income from each source.

MAKING RETIREMENT INCOME USING THE 4% RULE - Pie chart showing how a $4 million investment with 80% of assets coming from ESOP would generate an estimated yearly income of $160,000
To estimate your annual retirement income, identify what 4% of your total investment portfolio. The 4% withdrawal rate is not guaranteed to prevent you from running out of money, it is a guideline, and investments may lose value.

The 4% rule is one guideline for retirement spending. This means a properly managed investment could generate 4% of its value for many years. The 4% withdrawal rate is not guaranteed to prevent you from running out of money, it is a guideline, and investments may lose value.

  • $400k IRA could generate $16,000 a year

  • $400k 401k could generate $16,000 a year

  • $3.2 million ESOP could generate $128,000


Most individuals want to replace their annual income in retirement. The 4% rule will help you find the right nest egg amount to begin your retirement. As illustrated above, if your investment portfolio includes $4 million, it could produce roughly $160,000 a year before tax. If your goal is to have $80k annually at retirement, then you’ll need to have at least $2 million in your portfolio.


Risk

The 4% Rule is a guideline that may or may not be appropriate for your unique situation. Using 4% as a withdrawal rate, if investments perform poorly, you could run out of money during retirement. Some folks purchase annuities or rely on social security as guaranteed income sources to complement withdrawals from their investment portfolio. Your withdrawal rate may vary based on your financial plan, accumulated wealth, and capacity for investment risk. The portfolio your financial advisor creates for you will impact your withdrawal rate.


If your projected withdrawal rate does not meet your desired annual retirement income, you may be wondering what you could do to increase it.


Several options include.

  • Increase contributions to your 401k or IRA while you are still working

  • Delay retirement to build a larger nest egg

  • Delay taking social security to receive a higher payout

  • Fund an annuity as one component of your retirement income plan

  • Work with your financial advisor to change your investment portfolio

  • Consider reducing your retirement budget by paying off your mortgage

  • Downsize your home to reduce your retirement budget


Diversification As A Strategy

How your investment portfolios are managed is important for the security of your retirement income. The above example estimates a conservative 6% annual return. Your own investments may generate less or more, which would impact how long your investments will last with a 4% annual withdrawal rate.


Diversification is an important strategy to keep your investments strong. This diversification comes in the form of where your money is invested as well as creating a cash reserve to smooth out market fluctuations.


Other Sources of Retirement Income

Your investment accounts may not be your only source of retirement income. You may have retirement income from the sources listed below.


Sources of retirement income:

  • Social Security

  • A spouse or partner’s pension

  • Real Estate income

  • An annuity

  • Inheritance


Work with your financial advisor to identify and plan for multiple sources of retirement income. If there is a challenge with one source, another could help support your retirement budget.


Final thought.

Are you comfortable with your progress towards retirement? How about helping future generations meet their financial goals?


If you have a net worth over $2 million and need help from a wealth manager, the Peak Wealth Planning team can assist you.

Peak Wealth Planning specializes in helping high-net worth individuals and families plan for the future.


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About the Author

Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.


Peak Wealth Planning provides concierge services to meet your wealth management needs. Services include: financial planning, investment management, esop diversification, retirement income, insurance, and estate planning advice. Peak Wealth Planning is a fee-based financial advisor based in Champaign, Illinois, and Fraser, Colorado.