If you’re planning your retirement about now, it’s worth coming to this realization: You’re entering a new stage of life. It’s a simple statement; but, don’t confuse it as being simplistic.
You’ve been accumulating assets up to now; and, during accumulation, negative market fluctuations are not only partially masked by your ongoing contributions, they even allow you to gather additional positions at reduced prices.
Your new stage, however, is different. Instead of accumulating, you’ll be entering a drawdown phase of life… a phase where negative market moves will be magnified by the fact you’ll be drawing on assets, which will further deplete your account values.
How long will your money last? It depends on how much you’re drawing; but, a number of factors impact that decision:
Your Age and Health
How long will you live? No one really knows, of course. Most people, in my experience, simply take a guess, usually colored by their wishes. Some are so afraid of running out of money, their knee-jerk answer is simply, “I won’t live that long.” Others will examine their parents’ lives and health issues – not a bad idea – to come up with a guesstimate.
The Social Security Administration has a number of calculators you might find useful at https://www.socialsecurity.gov/planners/lifeexpectancy.htm. Another, maybe more useful one I found is at https://www.livingto100.com/.
Every family has an economist in residence: The one who does the grocery shopping. But, anyone who fills a gas tank has seen inflation first hand, too. Money is worth only what it will purchase. And, when it purchases less, you need more of it to buy the same things.
Simple concept, I know; but, here’s the kicker: The inflation figures you see that are put out by the government are (sorry) a joke: The government’s inflation figures DO NOT include food or energy: The two things EVERY retiree (and every other living member of the human species) will use.
While not all expenses will inflate (a fixed mortgage or one that’s paid-off), it’s a good bet that most expenses will – and at a rate higher than the government will admit to as they attempt to reduce what they will be required to pay out in Social Security benefits. After all, the government has a ton of debt and is running at a deficit; so, keeping outlays down (while bragging about low inflation numbers) works for them, but won’t help you (sorry, I need to enroll in a 12-step program, I know). An example of a potential hyper-inflation risk is one most retirees will need to address: Medical care. Coverage may be universal; but, deductibles above and beyond rising premiums will be an issue for many.
Many advisors are using rates between 3 and 4%; but, a number of well-respected advisors are looking back at, and using, a 30-year average, closer to 4.5%, when they plan the next thirty years with their clients. My parents retired in 1974 and soon thereafter entered a period of hyper double-digit inflation and interest rates. My dad lived 31 years in retirement and my mom passed away earlier this year at age 99. That’s a lot of inflation. Anybody remember how much a postage stamp cost in 1974?
Variability of Investment Returns
Here’s a statement of opinion you may find startling: There is no more meaningless statistic you’ll ever encounter than “average annual return” when you’re retired and need to make your money last. Two bigger issues are (1) variability and (2) sequence of returns. You may be able to manage one; but, you’ll have no control over the other.
For example – purely hypothetical – if a portfolio worth $500,000 incurred successive annual declines of 12% and 7%, its value would be reduced to $409,200, and it would require a gain of nearly 22% the next year to restore its value to $500,000.3 It’s a simple concept: A 20% loss on $100,000 becomes $80,000. But, it takes a 25% gain to offset that 20% loss. What if you had to take retirement income of $10,000, too? You get the idea. To get a clearer idea of how volatility can impact retirement outcomes during the “drawdown” phase of life, you may want to read my report, “The Hidden Risk No One Talks About“.
How do you counteract all this bad news? Do you stick money in the mattress? Bury it in the back yard? Maybe you pay for an expense-laden “guaranteed” packaged product that makes you feel good?
They answer is simple, but again, not simplistic: a solid financial retirement plan. Ideally, you’d begin when you’re young, in your early 30s at least; but, few do that. However, if you’re within ten years of retirement and haven’t done it yet, it’s time to start – yesterday.
There are excellent Certified Financial Planner® professionals everywhere (literally all over the world). You can find one on the CFP Board website. CFPs who are also members of the Financial Planning Association (FPA) can be located on FPA’s website.
By the way, John Wasik has written an excellent article on why early retirement seminars are (his opinion) scams. You can click on the icon below to read it (you’ll have to skip past an ad – it was posted on Forbes’ website).