The Road to Retirement: What’s My Number? By Peter Needham, MBA, CFP® and Ray Hawkins, CFP® One question we frequently hear from new clients, friends and others is “what’s my number?” or “when can I retire?” These questions seek easy answers to how much savings should be accumulated before retirement followed by an assumed safe withdrawal rate. Our response usually starts with “it depends” because each individual and family has a number of unique circumstances and variables that need to be considered and the original solution needs to be modified over time as needs and circumstances change. That’s why we believe each individual and family needs a dynamic strategy to manage the “number” that is unique to them. The 4% Rule: The 4% rule is frequently used to answer “what’s my number?” 4% is assumed to be a safe withdrawal rate in retirement. If you have saved $1,000,000 by age 65 you can draw $40,000 annually without fear of depleting your portfolio. However, there have been a number of statistical studies that factor stock market volatility over the past 20 years as well as the current low level of interest rates. The recommendation from these studies was to modify the 4% rule down to a level of 3.2% to 3.6% for a safe rate of withdrawal. However, a more thoughtful approach to planning and managing retirement is needed rather than a fixed, static percentage. First, there are a number of factors specific to the individual or family that must be considered. Second, a dynamic withdrawal strategy is best when faced with volatile markets and low interest rates. Factors To Be Weighed: There are dozens of factors that need to be incorporated into a retirement strategy. Each family situation is unique, and considerations could include caring for other family members to children living at home beyond college graduation. The most common factors to include are: ‐
Retirement age including a possible second career and spouses leaving work at different ages. This marks the end of the accumulation (savings) phase and the start of the decumulation (draw) phase. ‐
Life expectancy or longevity risk needs to be factored as people are living longer. The longer the retirement years the greater the chance of outliving your nest egg. Longevity also increases health care costs. A recent JPMorgan study noted that there is a 47% chance that at least one spouse will live to age 90 which was a 2% increase over the prior year. ‐
Social Security can be relied upon by some who have reached a certain age but becomes increasingly uncertain for the younger workers. There are so many different strategies for drawing Social Security benefits that AEPG® purchased software to optimize the results. For a married couple, the different strategies can save over $100,000 during their lifetimes. On balance, it is best to defer social security and pursue a strategy to optimize benefits. ‐
Long‐term care and health care costs must be considered as Medicare does not cover all medical costs beyond age 65. Fidelity Investments says that a 65 year old couple retiring in 2013 will need an estimated $220,000 for uncovered medical expenses in retirement. A JPMorgan study states that at age 75 there is a 55% likelihood that men will require long‐term care and a 72% chance for women. ‐
Market Risk needs to be considered when constructing a portfolio and the portfolio needs to be calibrated to reflect an individual’s appetite for market volatility. The portfolio needs to be rebalanced as retirement approaches and beyond. Fixed income and/or annuities can be used to provide cash flow and a fixed income strategy lowers risk by providing a counter balance in a portfolio during fluctuations in the equity markets. However, there is a risk of being too conservative as even after retirement there must be provisions for growth to sustain the assets for decades and current yields are nominal at best. ‐
Taxes at the federal and state level must be factored into the retirement strategy. Everyone is subject to multiple taxes in retirement as well as potential estate taxes when we are “on the wrong side of the grass”. IRA, Roth and taxable accounts entail different strategies over time. Dynamic Withdrawal Strategy A dynamic withdrawal strategy better serves individuals than the static 4% rule. The strategy needs to reflect the above factors as well as other specific considerations for the individual or family. Market volatility and extremely low interest rates need to be considered. The dynamic strategy should establish a core withdrawal rate coupled with a higher variable rate matched with higher returns. For example, the strategy could set a 3% withdrawal rate during years where the returns range from +4% to negative returns. Portfolio returns of 5% to 10% would be paired with 5% withdraws and +10% returns would allow 6% draws. The lower core rate of withdrawals does not deplete the balance as much during periods of flat or down markets while the higher draws are paired with stronger market cycles. The dynamic strategy still needs to be periodically reassessed and address varying needs or contingencies. Conclusion Life and the financial markets are way too complicated to rely on the simplistic 4% rule and no computer model or so called “robo‐adviser” can replace the value added from working face to face with a Certified Financial Planner (CFP®) professional who can explain and simplify the decision making process or you. Each individual or family is different and has unique circumstances that must be addressed. Modifications are required as circumstances change or evolve. “It depends” can be a lengthy response to “what’s my number?” Important Disclosures:
The information, analysis, and opinions expressed herein are for general and educational purposes only. This article
is not a substitute for personalized advice from AEPG® Wealth Strategies and nothing contained in this presentation
is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the
appropriateness of any investment, nor a solicitation of any type. This information is current only as of the date on
which it was sent. The statements and opinions expressed are, however, subject to change without notice based on
market and other conditions.
Definitions of the indices listed herein are available upon request. All investments carry a certain risk, and there is no
assurance that an investment will provide positive performance over any period of time. Investment decisions should
always be made based on the investors specific financial needs, objectives, goals, time horizon, and risk tolerance.
Please remember to contact AEPG® Wealth Strategies if there are any changes in your personal or financial
circumstances or investment objectives as these changes may impact our previous recommendations. A copy of our
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