Shooting For a 30-Year Retirement?

“The greater damage for most of us is not that our aim is too high and we miss it, but that it is too low and we reach it.” – Michelangelo

5-minute read

• The Way of Real Estate
• The Way of a Diversified Portfolio
• Safe Withdrawal Rates
• Determining How Much You’ll Need
• Determining How Much You Can Spend
• Expert Guidance

Early in our marriage, Lynn and I determined that we needed a downsized personal residence on a single floor and one additional rental door to support our lifestyle.

Whether your vision of retirement involves exotic beachfront locations, exploring new hobbies, or just hanging out with the grandkids, it's something you've been looking forward to your entire life.

Two fundamental (and very related) questions that clients frequently ask us about their retirement planning are:

• How much do I need to save for retirement?
• How much will I be able to spend in retirement?

Be warned of the following assumptions, but it will save 700 words in this blog.

Today, let's delve into these assumptions and, most importantly, understand how these two questions are intricately linked, reinforcing the importance of sound financial planning in securing your retirement.

But first, let's consider:

The Way of Real Estate

Real Estate Investors (REIs) approach this whole issue differently. If you do an internet search, you will get studies (mathematics) from companies that benefit from a more traditional retirement approach. They make their money from financial products. So, you'll see their data for Roth IRA (Individual Retirement Account), plans that increase your savings rate, and tax-deferred plans like regular IRAs.

The movers-n-shakers are taking advantage of new Charitable Remainder Trusts (CRTs) varieties. Set up well, these offer asset protection, insurance, and tax-free growth. Your criteria for an internet search are Asset Accumulation, Debt Planning, and Cash Flow Analysis.

Plus, real estate keeps abreast of inflation for your garden variety buy and hold properties.

Now, let's explore another approach to retirement planning:

The Way of a Diversified Portfolio.

1. Your retirement savings and investments– combined with any pensions you'll receive plus Social Security – will ultimately dictate your retirement lifestyle.
2. Looking at it another way, knowing how much you'll need to withdraw from your retirement portfolio every year can help you determine how much you need to save and invest.

From either perspective, these are good numbers to know. As the old saying goes, failing to plan is planning to fail. How do we go about making these determinations?

Safe Withdrawal Rates

In 1998, three finance professors at Trinity University in San Antonio, TX, published one of the most influential research papers in the history of investing. The study aimed to determine what percentage of a retiree's total investment portfolio could be spent every year without ever running out of money. The goal was to establish a safe withdrawal rate that allowed the retiree a way to maintain their standard of living over the course of their retirement. In other words, annual spending needed to increase each year with inflation.

To do the math, our intrepid professors made several assumptions. They assumed retirements would last for periods of 15, 20, 25, or 30 years. They used real stock market returns between 1925 and 1996, examining every rolling 30-year period in that interval. Lastly, they analyzed a large number of different asset allocations, meaning the percentage of stocks versus the percentage of bonds in the portfolio.

After meticulous calculations with their giant abacus and thorough analysis, the 4% rule emerges as a reliable guide for your retirement planning, providing a sense of security and confidence in your financial future.

Of course, their definition of "not running out of money" might be a bit concerning. They considered any particular 30-year period to be a successful retirement if at least zero money remained at the end of the 30 years. Yep, zero remaining, as of the final day of the 30th year. That was OK with them. If the money ran out before then, it was considered a failure.

The infamous 4% rule you may have heard about comes from this. And it's been debated endlessly ever since. Plenty of other studies have pinned the magic number closer to 3%, and few say even less. Some studies say 5%, and a few say even more.

While not accepted by everybody and still heavily debated by academics, Internet pundits, and financial planners, the general ballpark answer of around 4%, give or take, has withstood quite a bit of scrutiny.

Does your head hurt from the math talk? Great, let's do some more!

Determining How Much You Need

All of this academic research gives us some helpful insight. Let's start using the 4% rule of thumb to determine how much you'll need to save for retirement. For the sake of simplicity, we're going to ignore any pension you may end up receiving, and we'll also pretend that Social Security doesn't exist.

To determine how much you need to save for retirement and maintain your current lifestyle, simply add up everything you spend in a year. Then, multiply it by 25 (which is the same as dividing it by 4%). You must do this with your living expenses, not your income.

Let's say you spend $50,000 a year to live your current lifestyle, regardless of your income. In order to live that same $ 50,000-a-year lifestyle, including adjusting for inflation, the 4% rule of thumb suggests that you'll need $1.25 million in your portfolio to retire.

Again, we ignored pensions, Social Security, and several other factors. But this is a great starting point for a simple rule of thumb. 4% can help tell you whether you're on track or not. We can help you calculate a more precise number next time we have a conversation, if you'd like to discuss that.

Determining How Much You Can Spend

If you're getting close to retirement age or already retired, you may ask a different question: How much can I spend based on what I have?

For example, let's say you're 60 years old and will have $300,000 saved up between a 401k and an IRA when you retire at age 62, the earliest age you can claim Social Security. If you anticipate living until age 92, your portfolio would provide $12,000 per year for you to live on using the 4% rule. If taking Social Security gives you $1,000 per month, you'd have $2,000 per month to live on for the rest of your life.

While an awkward topic of conversation, determining your life insurance needs is a critical component of smart financial planning.

And remember: Those beaches out there calling your name ... you also remember that YouTube and TikTok are unreliable sources of money information. Find a tax strategist and other financial professionals who specialize in this planning.

BE THE ROAR not the echo®

Warmly, Janet, The Tax Wizard