CEO/Chief Economist & Investment Strategist
Streettalk Advisors, LLC
Destitute at 80
There has never been a thirty-year period for the stock market when investors have lost money; yet there have been quite a few thirty-year periods that have bankrupted senior citizens who were relying upon their stock portfolios for retirement income. With today’s economic malaise, political messes and stock market crashes, it is highly likely that many entering into retirement will be destitute by 80.
Whether you are there now or saving to be there one day, retirement for many is that time when we use the “goose” that we have built over many years of saving to fund our retirement. For those of us that are still building the nest egg, we want to know how much will be required to meet our needs. Upon retirement, we need to know what level of income (or withdrawals) from our investments that we can have each year to sustain our lifestyle – the safe withdrawal rate of “golden eggs” from the “goose.”
The “safe” withdrawal rate is the percent of the starting portfolio that can be harvested each year for living expenses. For example, a retiring couple with $1 million that needs $50,000 to supplement social security would be taking a withdrawal rate of 5%. Of course, expenses rise each year due to inflation. Therefore, the withdrawal in future years should keep pace with inflation. As a result, there is a key assumption for retirees about the initial and continuous rate of withdrawals from their investment portfolios to be safe from failure.
The key variables are
1. Success rate, as reflected in the percentage risk of not running out of money.
2. Portfolio mix and return assumptions.
3. How long the retiree assumes that they will live.
4. A variety of other variables including tax rates, investment expenses, etc.
In general, most models say that a retiree can withdraw 4% to 5% of the original balance each year, increased annually to cover inflation, and still have a very good chance of not running out of money. A retiree today has a relatively long-term horizon with an average retirement age near 60 and an expected lifespan for the last surviving spouse of almost 30 years.
Despite the use of average assumptions, your results will unlikely be “average.” As far as success is concerned, your results will be binary–either you will be successful or not.
It does not matter whether you–on average–have a 75% chance of success. For you, it will either be 100% or 0%…you will either have enough or you will run out. Therefore, we are keenly focused on the implications of the assumptions and the likely impact that they have on your future.
Using history to assess the likelihood of success, a retiring couple that starts with withdrawals of 4% has a 95% chance of success of not running out of money before the average last surviving spouse no longer needs withdrawals. For example, this represents an initial $40,000 for a retiree with $1 million, increasing the $40,000 at the start of each year by inflation. Since MOST individuals have far less than $1 million saved up for their retirement and $40,000 is near poverty levels in the U.S., this should start you thinking about saving or pre-applying to Wal-Mart for a greeter position.
As you try to better determine the odds that drive whether it will be success or cat food, the key difference is the economic strength of the country when you are heading into retirement and the level of interest rates. Unfortunately, both of those are not at levels that can sustain the average portfolio for the next 30 years. It is more critical now than ever, that individuals think about income generation and capital preservation far more than hoping the stock market “casino” will bail them out.
Being destitute when you turn 80 is not something that anyone plans for. However, it will be a reality for far more people due to lack of planning, preparation and discipline. It is never too late to get started; it just gets harder the longer you wait.
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