If you’ve been asking yourself the question, “How much money do I need to retire?” you’ve probably been confused by conflicting advice. So here is a little food for thought.
First, compare how much income you need every month to cover all your expenses against how much money you will have coming in. Include all of your monthly sources of retirement income, including pensions, Social Security, income from rental property, etc. (Remember, most people spend more money at the beginning of retirement on things like travel. As they get older, they will tend to spend less.)
After you’ve done that exercise, you may see more clearly how much additional monthly income you need to generate/withdraw from your savings and investments.
Watch Out for the Rule of 100
Many financial professionals advocate following the rule of 100—shifting a percentage of your portfolio asset allocation into safe investments like “bonds” (“safe investments” being a term they often use synonymously with bond funds) based on your age, and leaving the rest in stocks. Basically, the rule says that when you’re 60 years old, you should have 60% of your portfolio allocated to bonds, when you’re 65, it should be 65%, and so on, increasing as you get older.
Unfortunately, this is terrible advice, in our opinion, given the historically low interest rate environment we find ourselves in. It makes no sense to invest the majority of your money in assets that are paying you almost nothing.
But there is a bigger problem. And that is: interest rate risk. Interest rates are likely going to continue to go up, which means bond funds will go down. This has been borne out historically many times.
So once again, let’s address the question, “How much money do I need to retire?”
The 4% Rule
Still in use—even after being debunked by its creator—the 4% rule says you can “safely” start withdrawing from your bond-heavy retirement portfolio at the rate of 4% per year once you have amassed a certain amount. That amount is derived by working backward from your life expectancy using the 4% withdrawal rate, usually accompanied by a vague phrase like “based on a return rate of 7%” for your overall portfolio.
Unfortunately, that fuzzy math doesn’t take into account year-over-year inflation, income taxes, Required Minimum Distributions, realistic rates of return, the overall economic climate, interest rates or really anything of importance when it comes to retirement distribution planning.
In short, the answer to that question is that you need a customized retirement plan designed just for you by an independent, fee-based fiduciary. A firm like Decker Retirement Planning, Inc. can map out your income versus your expenses year-by-year, adjusting for critical factors like inflation and taxation. An independent fiduciary has access to many unique strategies and diverse, principal-guaranteed investment products not offered by most big banks or brokerages.
These sorts of “outside the box” strategies may offer retirees the chance to retire earlier and with more protection by using investments that offer principal guarantees.
Decker Retirement Planning, Inc., specializes in retirement planning, with offices in Seattle, Kirkland, and Salt Lake City. Reach out to Brian Decker at 855-425-4566 if you have questions and want to learn more.