FORECASTS & TRENDS E-LETTER
by Phil Denney
December 12, 2023

IN THIS ISSUE:

1. How much do you need to retire?

2. The 4% Rule for Retirement Income

3. What if Your Retirement Nest Egg Isn’t Large Enough?

4. When should you Retire?

5. Remembering Gary

Overview

You may already be retired, so you might not think this article is for you. You already have your investment plan in place and what could go wrong anyway. Well politicians change, policies change, laws change, social norms change and the economy changes.  Your health also changes. In my life getting older hasn’t been the problem, it is the side effects. For those not retired yet, hopefully these topics will help you in planning your retirement.

How much do you need to retire?

Generally, most retirees and pre-retirees underestimate what their expenses will be. A $2.5 million nest egg is substantial and can provide financial security for many couples, but whether it's enough for you depends on various factors.

First, consider when you plan to retire. If you retire at 60, $2.5 million won’t stretch as far as it would if you retired at 70, as the money needs to cover a longer retirement period. The earlier you retire, the greater the risk of outliving your savings, which makes proper financial planning essential.

Another significant factor for a couple is life expectancy. With advances in health care, people live longer, which means retirement savings must last longer. People living longer may also lead to potentially funding long-term-care needs, such as skilled nursing care.

Couples also face challenges if their lifestyle is too lavish. Expensive travel and leisure activities can burn through your $2.5 million faster than you may realize. Maintaining a frugal lifestyle or having additional sources of income can help bridge the gap. Market fluctuations and investment decisions play a role too, as poor investment choices can deplete savings quickly.

You can find calculators on the internet to help you calculate the size nest egg that is right for you, but there is a simple calculation on how much you might need. Here it is. If you estimate an income need of $100,000 annually before taxes and assume you need 4% income from your nest egg to deliver that amount of income, you need a nest egg of $2.5 million ($100,000/0.04). Note that you use 0.04 in the calculation and not 4%. Too many investors fail to do this simple calculation.

One more simple calculation. You should consider an estimated inflation rate in retirement (make an educated guess). If you assume an inflation rate of 3% and you add that to your 4% income need, then your portfolio needs to deliver at least a 7% total return, before taxes. Therefore, your portfolio needs to grow by 7% annually to stay pace with inflation and generate the income you will need. If that happens, your portfolio should grow to about $2.575 million. Taking a 4% distribution of that amount generates an increase in income for the next year to $103,000 and so forth in the following years. Keep in mind, the previous is a simple calculation and assumes annual growth of 7% each year with no negative years.

So where do you start? You prepare an estimated cash flow statement for retirement, estimating your monthly expenses and income from pensions and/or Social Security. I call it a cash flow statement because many folks don’t like the word “budget.” You must know where every dollar will go and not assume it will all work out. A failure to plan on your part is a plan to fail.

The 4% Rule for Retirement Income

The 4% rule has long been the gospel of retirement math. Research shows that starting at that rate would have protected retirees from running out of money in every 30-year period since 1926, even when economic conditions were at their worst.

The previous math examples assume your portfolio goes up every year. Therefore, your income goes up every year too. As you know, that isn’t always the case. It depends on how your retirement nest egg is invested and economic conditions. An investment allocation will probably be diversified between stocks, bonds, bank certificates of deposit (CDs) and some in cash. Keep in mind that the more you put in the stock and bond markets, the more volatile your portfolio. Yet to stay ahead of inflation you need them both. Remember that in 2008 the correlation between stocks and bonds was high, so everything went down at the same time.

Hypothetically let’s be kind and say your well diversified portfolio drew down -10% in 2008 and perhaps that was your first year of retirement. Remember you took 4% at the beginning of the year for income, so your portfolio is now down the -4% distribution plus the -10% return for a -14% total return or -$350,000. Your $2.5 million portfolio is now $2.15 million. A 4% distribution rate for your second year in retirement is now $86,000 and not the expected $100,000 ($2.15 million x 0.04).

What do you do now? You can take an income cut and adjust your spending or stay the course with the same level of income at $100,000. If you are confident in your portfolio allocation and the potential growth of the economy, perhaps it will do better next year? My point is that you can’t make your retirement calculation one time and never look back. You need to reassess it at least annually.

What if your retirement nest egg isn’t large enough?

You need a “budget” more than ever. Again, call it a cash flow statement if that helps you do one. You start at the top of the sheet with your inflows of income from all sources (after taxes), such as pension and Social Security benefits, and income from your investment portfolio. In addition to financial giving to your favorite charities, you then focus on the four walls – food, shelter, utilities, and transportation. After that you list personal expenses and debt. Hopefully you don’t have any debt, but many are entering retirement with a home mortgage and car payments. If your budget is tight, you need to downsize both to reduce/eliminate the debt expense.

What you don’t do is swing for the fences with whatever size your nest egg. Chasing yield can come back to hurt you and those depending on you. Usually the higher the return the higher the risk to principal. Be careful out there.

When Should You Retire?

It depends. I struggle with this question myself. Some things we can do in retirement are volunteering, travel, learn a new language, spoil grandkids, read and write. Hmmm, so I already do those things. I just finished assembling a playscape in our back yard for the grandkids. That was a challenge (a lot of praying and patience). What else is there to do? I love what I do at Halbert Wealth Management, so why do I have to give that up? Well enough about me, what about you?

I submit to you that the question may not be just when to retire, but what will your retirement look like? Is it really an age? What about your health? Some introspection is in order. It’s important to reflect on what matters to you. What kind of legacy do you want to leave behind?

Research indicates that those who are happiest in retirement tend to answer that question by “giving back” as part of discovering a sense of purpose. Most successful people in retirement look to use their talents and passions to contribute to their local community. It isn’t just increasing your charitable contributions. It is often in the form of volunteering your time. The thing is, no one really knows how he or she will feel once retired. Before retirement, it’s all hypothetical. You will most likely need to make adjustments, especially in the first year or two.

If you aren’t already retired or even retired and haven’t figured it all out, start volunteering in your community now. Perhaps there is a charity that works with at risk youth who need a mentor. Perhaps there is a charity that mentors’ men or women in a nearby prison/jail. Perhaps your church needs someone to help with their children’s ministry or volunteers to make the coffee or greet people. Google it, you will see a wide range of volunteer opportunities.

If you are concerned about your ability as a volunteer, try it on for size. I have found that only by taking the risk of doing something that may be uncomfortable at first that I discover whether it was right for me or not. Just do it!

There is no one formula. Retirement can take a lot of shapes. There’s a lot of different ways you can be successful in retirement and find meaning. So when should you retire? Do the math, create a cash flow statement, and start volunteering your time now.

Remembering Gary

Gary really liked to entertain guests at their home on Lake Travis. My family’s favorite memories are the company parties at their lake house. Our daughter Sarah especially enjoyed the water activities and the high dive off the boat dock. One time Gary even invited Sarah to bring a friend, because she had missed the company party one year. She took one of her girlfriends with her and Gary entertained them. It is one of her fondest memories of Gary.  

I am thankful to have known Gary. He was a man of integrity, humble and very generous.

All the best,

Phil

 

Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.