Conventional wisdom today in retirement planning is to save a “big bucket of money,” make a bunch of assumptions about the future and hope you don’t outlive your savings. This is a flawed strategy that can and should be avoided for several reasons. Let me explain.
The strategy recommended by the experts:
- Let’s say a retiree needs $75K a year to live the lifestyle they desire. Subtracting income from other sources of $25K, they plan to withdraw $50K per year from savings.
- How much do they need to save? 25 times $50K or $1.25M. If we assume 3% inflation and retirement in 15 years, the inflation adjusted total savings required is $1.9M!
- In year 16 they can start drawing 4% a year. If their annual return on investment equals the annual inflation rate, the funds last exactly 25 years.
What’s wrong with this strategy?
- The whole idea of spending down savings or principal is wrong. Who knows how long someone is going to live? And after saving an entire lifetime, who can sleep at night with the possibility of running out of money increasing with each passing year?
- A retiree needs to save a lot of money for this to work (see above.)
- This is a high risk strategy as the variables and assumptions need to align just perfectly or the funds will be depleted in 15 to 20 years. Imagine the feeling of helplessness for a retiree who knows they can’t control inflation, volatility of the returns, rates of return or big losses in early years.
What’s a better strategy?
- Reject the idea of spending down your nest egg in retirement and start thinking about income replacement at retirement (IncR.)
- Consider buying income producing property to replace lost income from employment with rental income at retirement (talk with your CFP about other investments that can provide real income without liquidating principal.)
- Build a new plan that works for you: provides sufficient IncR, increases your control and reduces the risk of running out of money in retirement.
If you have a BIG bucket of money or a high degree of confidence you can manage through the risks and variables, then carry on! For everyone else, continue reading this blog over the coming months as I outline the steps to build a plan for buying income producing property and replacing income at retirement (IncR.)
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