Are you worried about your retirement? Are you worried you will not have enough money for your retirement? If so, you are not alone in these fears. Many approaches or enter retirement, wondering if they do have enough saved as people can now spend 30 plus years in retirement. And no, Social Security will not be enough for you to survive, much less live on. So, what kind of figures do you need to consider? In this article, we will examine just that very thing.
In this series of examples, we will make a few assumptions on a $1,000,000 portfolio. In these examples, we will assume that we will assume a return of 4% in one portfolio and the other a 9% return. In these two $1,000,000 portfolios, they will produce $40,000 and $90,000 annually to live on with any other retirement savings or funding sources we may have. In these examples, we will use a 3% and 5% inflation rate over the length of a 30-year retirement period. And finally, these portfolios are not being held in an IRA or 401(k) plan but rather a brokerage account where taxes will not be considered as everyone has a different tax situation. But remember to account for taxes for in real life.
In the first example, our portfolio will earn 4% with a 3% inflation assumption meaning the real return on the portfolio is 0.97%. The portfolio will still produce $40,000 in annual income each year for the 30-yeat period. But wait, the effects of inflation will mean that at the end of the 30 years, the $40,000 in income will only be like receiving $16,480 or where $100 is about the same as $41.20. This means that you will need to increase the $40,000 in annual withdrawals to keep your spending power the same, but we will not address that here, just like taxes, keep that in mind. And if you were to take the $40,000 out, your $1,000,000 would run out after 28.45 years, meaning it would not last the full 30-year period.
If the portfolio were to return closer to the average that equities over the last 100 years of 9%, they would pull $90,000 out per year. With everything else the same, the real return on this portfolio would be 5.83%, and at the end of the 30 years, the funds would be equal to $37,078. In this scenario, the funds would run out after 17.72 years, meaning this would be an unacceptable way to use the portfolio.
We will look at the same two scenarios that we just did, but the inflation rate will be an assumed 5% instead of the 3% we just looked at. The first portfolio will still produce the $40,000 in annual income, but now it will be worth $9,255 in 30 years and run out of funds in 22.52 years because the real return is now a negative 0.95%. The same $90,000 is produced in the second portfolio worth $20,284, running out after 14.01 years and a real return of 3.81%. With inflation being 2% higher, the value of $100 is now only equivalent to $23.14. This is why we must find a way to not only beat inflation to make our portfolio last the full 30 years. We must make our portfolio grow and not shrink so we can do more over our retirement.
Finally, our portfolio will earn a 9% annual return. Yet, we will only withdraw the standard 4% that most financial advisors recommend as the safe percentage to take so that you do not deplete your funds while you are in retirement. In this example, we will take the $40,000 and reinvest the difference of $50,000 back into the portfolio. Our $1,000,000 portfolio will earn a real return of 5.83%, which would allow you to pay taxes and increase your withdrawals over time, so your purchasing power will remain consistent. But ignoring taxes and the decrease of purchasing power, the initial $1,000,000 and reinvested $50,000 over 30 years would grow to an amazing $9,533,766.15. This is why your retirement portfolio must continue to grow during your retirement so you can pay the required taxes, increase your withdrawals to account for reduced purchasing power, and possibly leave a legacy to your heirs.
While I do not know your retirement situation, and I would not make blanket recommendations, you must grow your investments. While there used to be a standard 60% equity and 40% fixed income or something similar, I feel that you need more equities to survive 30 plus years in retirement. That is the best asset class that will allow you to make a sufficient return to cover inflation.
Wharton Professor Jeremy Siegal has written extensively on the power of investing for the long run and equities. He shows that over decades of investing in equities is less volatile and risky than people believe. This means that if you invest long-term, a low-cost indexed fund is a way to invest to take full advantage of equities’ growth power and their approximate 9% return. For more information on Professor Siegal’s books, visit https://amzn.to/31kT9b3 to learn more about Stock for the Long Run or https://amzn.to/348Ym7K to learn more about The Future for Investors. I have read both of these books, and I put them right up there with Ben Graham’s The Intelligent Investor. For more information on this book, go to https://amzn.to/2HaZChs.
Approaching your retirement can be a stressful and complicated matter for the best of us. To ensure that you are positioning yourself in the best possible way, consult a values-based fee-only Registered Financial Consultant for assistance.
While Social Security isn’t enough for some people I could probably live pretty well on my wife’s and my Social Security when we start taking it. At age 70 it will pay us over $65,000, and will be adjusted for inflation. That’s with me taking my Social Security at 70 and my wife taking 1/2 of mine, since that is larger than what she would get by claiming her own. My benefit is higher than most because I paid the maximum into Social Security every one of the 35 years in my earning record. If something happened to Social Security I’ve still got several million in investments but living on $65 wouldn’t be a real hardship, we’d only have to cut back a little.
Yes, you would definitely be in the minority as far as Social Security recipients as I recently read that the average benefit is about $1,500 a month or $18,000 and for someone in your position $27,000 for a couple. Meaning for the average person they will need to supplement Social Security. And as you mentioned in your comment you still have an investment portfolio to provide any supplements your family would require. I really do commend you on your success and planning for your family’s golden years and all I can really say is well done and congratulations. I would also like to know more about your situation if you would like to discuss things please email me at kirk@kgmeyerpc.com.