When Can I Retire?
Without a doubt this is the number one question and concern I hear from people in regards to retirement. Then that question is usually followed by some sort of statement such as "I'm afraid I will run out of money in retirement" etc, etc. So let's talk about this and see if you can retire and have enough money to retire without running out. I think these are questions I can answer with a certain amount of confidence and hopefully I can give you some clarification in the process.
Often in conversations with people, I find that they think retirement is some magical age where you just quit working, usually 62ish, and hope things work out for you. In my experience that's not true at all. When you can retire comes down to basic math. Before we solve this problem we need to address two questions.
1. How much money do you have saved for retirement?
2. How much money do you need per year to achieve your ideal retirement?
I'm about to let you in on a secret that most financial advisers won't tell you. The answer to "When can I retire" comes down to 5th grade math. The secret is the 4% Rule. The rule states that you take the money you have saved and multiply it by 4% and that is the safe amount you can withdrawal per year from your retirement savings without a concern of running out of money.
Now, before you google this rule, I'm going to let you know that what you will find are a list of blogs and videos of why it's outdated and why it doesn't work etc. What these blogs and videos will fail to tell you is they aren't actually using real life examples, they are basing their arguments off worst case scenarios. Basically they are saying what if this happens, what if that happens, yada yada, to which my response, would be, yeah but, what if it doesn't? Google is great for information and terrible for wisdom.
The 4% Rule
Quick background on the 4% Rule. In 1994, financial planner William Bengen faced that question from clients who were nearing retirement. Bengen decided to research investment performances from 1926 to 1976 to see how various withdrawal rates would have affected retirement portfolios.
Bengen came up with the four percent rule. According to Bengen’s rule, a retiree with a portfolio of 50 percent stocks and 50 percent bonds will not outlive the funds if he or she withdraws 4 percent of the account balance the first year of retirement and then adjusts the withdrawal amount for inflation in each year thereafter. The rule assumes the portfolio would have to last for at least 30 years.
“Assuming a minimum requirement of 30 years of portfolio longevity, a first-year withdrawal of 4 percent, followed by inflation-adjusted withdrawals in subsequent years, should be safe,” Bengen wrote in his 1994 study, Determining Withdrawal Rates Using Historical Data.
I want you to look closely at what years he studied this. This study included the years 1926-1976. Anyone, wonder why this is important? If you answered, because it included The Great Depression, you would be right!
So let's do some basic math. You have $1,000,000 saved for retirement. The 4% Rule says you can withdrawal $40,000 per year and increase that amount for inflation each year and not run out of money if you have a portfolio of 50% Stocks and 50% Bonds. So if you could live on $40,000 a year and you have $1,000,000 dollars then yes you could potentially retire right now if you want!
Stock Market Return Since Inception
The reason the 4% Rule works is that since the inception of the stock market all the way back to 1926, the average return of stocks has been 10%! That includes The Great Depression, The Great Recession, Corona Virus on and on and on. So if we assume inflation averages 3% a year, (which it does average 3% a year) that would make the net return of stocks since 1926 seven percent. See what I did there 10% minus 3% equals 7%.
So if I have 94 years of history showing me that my net return on stocks is 7% and I'm only spending 4% based off the 4% Rule, wouldn't I actually die with extra money? If you answered yes, then you are correct! Not only will you not run out of money, you will die wealthier than when you began! Crazy to think about isn't it!
Do I Need a Financial Adviser?
Here's what I can tell you. We've already discussed that since the inception of the Stock Market the average return of stocks has been 10%, however, the average investor has only received around 3% return on their investments. Which if you factor in 3% inflation their return on investments is essentially 0% and sometimes the average investor actually has a negative return on their investments over their investing life. Anyone want to guess why that is?
The answer is they didn't have a financial adviser to keep/coach them from making mistakes when the stock market gets volatile. These investors panicked anytime the market dropped and they sold their investments at a loss and thus locked in that loss for the lifetime of their investments. We literally just saw this happen during the Corona Virus and we will see it again and again throughout the years to come.
The reason you need an adviser is because if you don't have one, there is plenty of data that proves that you will make irrational and illogical decisions about your money when the next panic hits. You need an objective, unbiased, unattached third party to keep you from making The Big Mistake. You need a plan in place to give you confidence during a volatile market. You can't drive to an unknown destination without a road map. That's why you need a financial adviser. I tell prospects constantly, an adviser's value is NOT picking investments. An adviser's value is keeping you from making mistakes you can't financially recover from.
Why Should I pay a Financial Adviser?
So why would you even pay a financial adviser a percentage of your retirement assets? Here's why.
- Does it seem probable to you that with the sources my firm has access to that it might cause your long-term investment return to be at least 0.75% per year more than you might obtain on your own?
- Does it seem probable to you that we will save you at least 0.75% per year in the costs of mistakes you might make on your own that we will help you not make?
- Does it also seem probable that we might save you at least the equivalent of 0.75% percent per year in time, energy, worry, and record keeping?
Only one of these services needs to save you 0.75% for it to be a 100% plus return on your investment. This is why you pay a financial adviser.
Many people think the secret sauce is the adviser picking the investments for you. The real secret sauce is the adviser keeping you from making costly mistakes. Think of us as an insurance plan for your retirement nest egg. Except unlike most insurance plans we protect you before a disaster strikes, not after a disaster strikes.
You Need A Plan
A goal of retiring - without a plan to get there - is simply a plan to never retire. Retirement isn't some magical age. It's a dollar amount. If you're age 50 or over and still in the accumulation phase (pre-retirement) we can help you figure out where you need to go and how to get there. If you are retired or nearing retirement, we can create a plan which will outpace inflation and possibly leave a legacy to your family. The consultation is free and without obligation. Contact us to set up a consultation.
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Thanks for reading!
80/20 Financial Services is an independent Registered Investment Advisory Firm. We help clients age 50 and over plan their retirement income and investment strategies. Contact us today for help with your retirement needs.