The New Rules of Retirement: Part I

The New Rules of Retirement: Part I

March 22, 2018

What if you learned that all you believed about saving for retirement was incorrect? What if the rules changed somewhere along the way and no one told you? When would you want to know?The dream is that you work hard until age 65, saving for retirement all along the way, and then you retire and live out the rest of your life comfortably with plenty of financial resources. In fact, retirement is sometimes likened to a “30-year vacation.” But before you get on that retirement cruise ship, you need to know if you are boarding the USS Smooth Sailing or, in reality, the Titanic.

What happens if you live too long? What if your investments don’t perform as hoped? Or what if you take too much out each year and you end up with nothing to live on? This is where not understanding the rules of retirement can get you into trouble.

The safe withdrawal rate refers to the rate that someone can withdraw from their portfolio each year and be reasonably confident that they will not run out of money. This article will discuss the safe withdrawal rate and the factors that affect it.

To begin, let’s consider someone with a goal of climbing Mount Everest. If asked, they may respond that their ultimate goal is to “plant their flag” on the summit of Mount Everest. However, if they really think about it, they will eventually realize that planting their flag is only half of their goal. The full goal is to plant their flag… and then to safely descend back down the mountain. 

This story reminds us that, just like climbing Mount Everest, there are two phases to retirement. The first phase is climbing up the mountain. In retirement planning, this is the pre-retirement phase or what is often called the Accumulation Phase. The goal of this phase is to accumulate as much wealth as possible before you finally scale the mountain and “plant your flag,” or retire. The second phase is climbing back down the mountain. In retirement, this is the post-retirement phase or what is often called the Distribution Phase. The goal of this phase is to make sure you safely descend the mountain, or live out your retirement years without running out of the wealth you accumulated.

One of the challenges pointed out by this analogy is this: none of us know just how long climbing down the mountain is going to take. Life expectancy, or what we call “how long I am going to live,” is a huge factor in your retirement. What most people don’t realize is the average person who is age 65 will probably live a minimum of 20 years until age 85. And if the person is married, there is actually an even greater chance that they will live an extra 10 years until age 95. 

So, how will you fund those 30 years of living in retirement? When you retire, aside from a pension and any Social Security you may have, you also have the assets that you saved for retirement, typically what is inside your 401(k) or IRA accounts. These assets will have to provide you with two things:

  1. an income that never runs out: one that will last for an indeterminate amount of time. You don’t know if you are going to need income for 10 years, 20 years, or even 35+ years if you live to the age of 100 or beyond! Because of this unknown, you want assurance that your income will never run out as part of your overall retirement calculation.
  2. an income that increases every year to offset the effects of inflation.

For a stable retirement, you need to have a mapped formula that will give you income for the unknown length of your life and will keep up with inflation.

Part II to follow. Please view the complete article here.

© 2018 by Mark D. Kemp & Todd A. Little. All rights reserved. Distributed by Kemp Harvest Financial Group®.