To Live a Lifestyle: Saving for Retirement
How much money can and should you pull out from your nest egg once you actually do retire? Retirement seems to be very stressful for us humans wether we saved all along our working years and career journeys or wether we didn’t. There are many theories about how much money can be pulled out each month to help sustain the lifestyle we prefer or a lifestyle to help make ends meet.
Prior to the 2008 financial crisis meltdown, many academia suggested that a 5% withdrawal rate was sustainable over multiple market cycles and that the amount of assets you started with would last you until your journey on earth ends and your new journey begins. The assumptions used that force me to yell “Bogus Statistics”, or BS for short, are that this theory is often assuming the irrational capital markets act the same each decade for a buy and hold investor and the assumptions ignore what happens if you retire in a year like 2002 or 2008 when all sectors are getting hammered. We refer to this as sequence of return risk!
According to a Princeton Economist who wrote an article for Barrons in 2015, the traditional 4% withdrawal rate rule which became conventional wisdom in 1994, has assumptions that withdrawing 4% and adjusting for inflation each year thereafter would have a low rate of depleting their portfolio in 30 years. In 1994, 4% was conservative and living 30 years after retiring at 55 or even 65 and living another 30 years was well beyond average life spans. I totally agree.
Today, there is a 50% chance that one member of a higher income,65 year old couple will live until 95. The Trinity Study is also widely quoted as conventional wisdom and if you are interested, you can go to Wikipedia to read up on what it has to offer in the way of assumptions that are not relevant in the real world where you and I live. Most of these studies use the capital market returns from a buy and hold perspective, pick some blend of stocks and bonds and then run a Monte Carlo Simulation which illustrates different levels of volatility.
Here are a few Million Dollar Questions for you to consider. What would happen if you had a portfolio that did NOT have as much volatility as the capital markets or some index representing the capital markets? Would you need less money to start with in your nest egg to life the lifestyle you prefer and deserve? Would you be able to pull out a higher percent withdrawal rate and be confident and comfortable with it? Here is the distinction we all need to focus on; managing risk is more important then looking at the Wall Street average annual returns that Wall Street loves to hide behind.
Markets change and so will we.