If you’ve been asking yourself the question, “How much money do I need to retire?” you’ve probably been confused by conflicting advice. At Decker Retirement Planning, Inc., we specialize in retirement planning. Every week, we record a radio show covering important retirement topics, and we publish articles here on our website to help people learn more about retirement.
Don’t forget, we’re easy to talk with, too. We’re happy to meet with individuals who’ve amassed a nest egg but aren’t sure what to do next. Decker Retirement Planning, Inc. has offices in Seattle, Kirkland, and Salt Lake City. Please call 855-425-4566 to get started.
But, back to the question, “How much money do I need to retire?” The answer relies on math, which is where we always start with retirement planning. First, we compare how much income you need every month to cover all your expenses against how much money you will have coming in. We include all of your monthly sources of retirement income, including pensions, Social Security, income from rental property, etc. Some people have enough money to retire based on those income streams alone, even when we factor in a conservative cost of living/inflation factor of 3% every year and deduct anticipated income taxes based on your yearly projected tax bracket(s).
But, the majority of people will still need to utilize their retirement nest egg to its greatest advantage, parlaying it into a monthly income that won’t run out. That’s where the real fiduciary expertise meets the bogus and debunked rules still running rampant out there.
The Flawed Rule of 100
Maybe you’ve been told by a banker or broker that you need to start following the rule of 100, shifting a percentage of your portfolio asset allocation into safe investments like “bonds” (a term they often use synonymously with bond funds) based on your age, leaving the rest in stocks. Basically, the rule says that when you’re 50 years old, you should have 50% of your portfolio allocated to bonds, when you’re 55, it should be 55%, 70, 70%, and so on—increasing as you get older.
Unfortunately, this is terrible advice, in our opinion, given the historically low interest rate environment we find ourselves in. It makes no sense to invest the majority of your money in assets that are paying you almost nothing.
But, there is a bigger problem, which is interest rate risk. Interest rates are likely to continue to rise, which means bond funds will go down. As an example, in 1994 the Treasury went from 6% to 8%. As a result of that, the average bond fund, according to Morningstar, lost 20%!
“Bond funds are far from ‘safe’ investments for retirees, in fact, these are extremely risky, especially in today’s economic environment.”
-Brian Decker, Decker Retirement Planning, Inc.
It’s important for you to know that bankers and brokers are basically salespeople, not fiduciaries. A fiduciary’s investment license mandates putting your best interests above everything else when giving you retirement planning advice, while bankers and brokers are subject only to a generalized “suitability” standard. They have a limited selection of investment options available to them, they only make money when you stay invested in the stock/bond market, and they are generally unaware of alternative investments that offer principal guarantees to retirees.
So, once again, let’s address the question, “How much money do I need to retire?”
The Debunked 4% Rule
Maybe you’re one of the “lucky” one whose stockbroker or banker advises you to rely on the 4% rule in retirement, after you have followed the rule of 100.
Still in use—even after being debunked by its creator following the 2008 recession—the 4% rule says you can “safely” start withdrawing from your bond-heavy retirement portfolio at the rate of 4% per year once you have amassed a certain amount. That amount is derived by working backward using the 4% withdrawal rate, usually accompanied by some vague phrase like “based on a return rate of 7%” for your overall portfolio.
Unfortunately, that fuzzy math doesn’t take into account year-over-year inflation, income taxes, Required Minimum Distributions, realistic rates of return, the overall economic climate, interest rates or really anything of importance when it comes to retirement distribution planning.
In fact, as retirement planners and financial fiduciaries, we liken these outmoded precepts to outright financial malpractice.
So, How Much Money Do I Need to Retire?
In short, the answer to that question is that you need a customized retirement plan designed just for you by an independent, fee-based fiduciary. A firm like Decker Retirement Planning, Inc., will help map out your income versus your expenses year-by-year, adjusting for critical factors like inflation and taxation.
We will use very specific math, and unique financial strategies geared to your individual situation.
You might find out that you need to work for another 10 years. You might be pleasantly surprised to find out that you can retire right now. But, you won’t know the true answer until you work with a fiduciary like Decker Retirement Planning, Inc., an independent firm that has experience working with retirees and that has access to many unique strategies and diverse, principal-guaranteed investment products you rarely get from big banks or brokerages.
